(1)

Includes 450,000300,000 shares of common stock which may be purchased by the underwriters to cover over-allotments, if any.

(2)

Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(c) under the Securities Act of 1933, as amended, on the basis of the average high and low prices of the Registrant's common stock on February 25, 2002,October 21, 2004, as reported by the American Stock Exchange.

        The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any state in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of such state.

3,000,000PRELIMINARY PROSPECTUS                        Subject to completion                        October 26, 2004

2,000,000 Shares

Common Stock

We are selling all of the 3,000,0002,000,000 shares of common stock offered in this prospectus.

Our common shares are traded on the American Stock Exchange, under the symbol "FVE". On                February 28, 2002,, the last reported sale price of our common shares on the American Stock Exchange was $8.29$      per share.

Investment in our shares involves a high degree of risk. You should read carefully this entire prospectus, including the section entitled "Risk factors" that begins on page 57 of this prospectus, which describes the material risks.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful and complete. Any representation to the contrary is a criminal offense.

The underwriters may also purchase from us up to an additional 450,000300,000 shares, at the public offering price less the underwriting discount, to cover over-allotments, if any, within 30 days from the date of this prospectus.

The underwriters are offering our shares as described in "Underwriting". Delivery of the shares will be made on or about                  March     , 2002..

        You should rely only on the information contained in this prospectus. We have not, and the underwriters have not, authorized anyone to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information contained in this prospectus is accurate as of the date on the cover. Changes may occur after that date and we may not update this information except as required by applicable law.

TABLE OF CONTENTS

References in this prospectus to "we", "us", "our", the "Company" or "Five Star" mean Five Star Quality Care, Inc. and its subsidiaries. In presenting "as adjusted" information in this prospectus, we have assumed that this offering has been completed and that we have applied the net proceeds as described in this prospectus. References in this prospectus to "Marriott" mean Marriott Senior Living Services, Inc., a subsidiary of Marriott International, Inc.

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Prospectus summary

The following summary highlights information contained in other parts of this prospectus. Because it is a summary, it does not contain all of the information you should consider before investing in our common shares. You should read the entire prospectus carefully, including "Risk factors" and the financial statements and related notes, before making an investment decision.

OUR COMPANY

We operate senior living communities, including independent living and congregate care communities, assisted living facilitiescommunities and nursing homes. Since we became a separate public company, we have selectively divested nursing homes and acquired independent and assisted living communities where a large majority of the revenues are paid by residents from their private resources. The following charts illustrate the changes in our business since we became a public company on December 31, 2001 to September 30, 2004, adjusted for the pending acquisition of LTA Holdings, Inc., or LTA, described below in "Recent Developments":

Five Star Operations
At December 31, 2001		At September 30, 2004
54 nursing homes                (5,074 living units)            2 independent living                 communities                (137 living units)		52 nursing homes             (4,847 living units)         34 independent living             communities             (7,821 living units)         62 assisted living communities             (3,935 living units)
$229.6 million revenues(1)		$694.0 million revenues(2)

(1)

Revenues at these communities for the year ended December 31, 2001.

(2)

Revenues at these communities for the three months ended September 30, 2004, annualized.

RECENT DEVELOPMENTS

        Since January 1, 2004, the following recent developments have occurred:

•

Improved profits.  We earned $0.06/share, $0.11/share and $0.    /share in the three month periods ended March 31, June 30 and September 30, 2004, respectively. Since we became a separate public company until 2004, we were not consistently profitable. We believe that our recently improved financial performance is the result of changes in our business which we have implemented; but, of course, our future profitability is not guaranteed. See "Risk factors" beginning on page 6.



•

LTA acquisition.  In September 2004, we agreed to acquire LTA for approximately $208 million. LTA owns and operates 47 senior living communities with 2,636 living units, which primarily

offer assisted living services. LTA's historical revenues from these communities for the six months ended June 30, 2004 annualized was $78.9 million, and 100% of these revenues were paid by residents from their private resources. LTA also manages 12 assisted living communities for third party owners, but we do not know if we will continue to manage these communities. We intend to finance the LTA acquisition with cash on hand, assumption of certain mortgage debt and leasehold obligations, and a sale leaseback of 35 LTA communities for $165 million. Our business plan for the LTA communities is to increase revenues by increasing occupancies at the communities. We also expect to realize cost savings by combining the LTA operations with our existing operations. We can provide no assurances that the expected financial benefits from the LTA acquisition will be achieved. Completion of the LTA acquisition is subject to various conditions customary in transactions of this type, including licensing and receiving third party consents. We expect this transaction to close before year end 2004, but there is no assurance that it will close. This offering is not contingent upon the closing of the LTA acquisition.

•

Pharmacy expansion.  In September 2004, we purchased an institutional pharmacy business located in Lincoln, Nebraska for $3 million. This business currently provides pharmacy services to 24 nursing homes. Our business plan is to expand this business by offering pharmacy services at some or all of the 14 communities which we operate in Nebraska. We used cash on hand to complete this acquisition.

OUR GROWTH STRATEGY

        In addition to managing our existing operations, we intend to continue to grow our business.

        Our principal growth strategy is to acquire independent and assisted living communities where a large majority of the revenues are paid with residents' private resources. We prefer to purchase communities which have achieved or are close to stabilized operations. For example, the LTA communities which we expect to acquire have current occupancy of approximately 85%, while the independent and assisted living communities we now operate have current occupancy of approximately 90%. We also try to make acquisitions where we can realize cost savings by combining operations with our existing operations.

        Starting in the mid 1990s, a large number of independent and assisted living communities were developed with financing from private equity and real estate opportunity funds. We believe that many of these communities are now at or approaching stabilized operations and many of these financial investors are now anxious to sell. For example: in 2002, we acquired 15 independent and assisted living communities which were assembled and developed by Constellation Health Services, Inc., a division of Constellation Energy Group, Inc., f/k/a Baltimore Gas and Electric Company; and the controlling shareholder of LTA is a private equity fund that was created by an investment bank. We expect to pursue similar acquisitions for the next several years.

        We also intend to expand our institutional pharmacy business. We acquired our first pharmacy in Waukesha, Wisconsin in 2003. As described in "Business—Recent Developments", during 2004, we acquired a second pharmacy located in Lincoln, Nebraska. Whenever we buy an institutional pharmacy business we seek to grow its business by providing pharmacy services at our senior living communities within the same service area. We are currently interested in acquiring pharmacies in other areas where we own senior living communities. We can provide no assurances that we will be able to continue these pharmacy expansion activities, but we intend to do so.

        Although expansion of our nursing home business is not our primary growth strategy, we have in the past considered acquiring more nursing homes. Most nursing homes are financially dependent upon the Medicare and Medicaid programs. Accordingly, we believe the potential for profitable operations of nursing homes is limited by government rate setting. In these circumstances, we are only interested in expanding our nursing home operations at prices which we believe take account of the risks inherent in government rate setting. In the past few years, we have not been able to buy nursing homes at prices we consider appropriate, but we may continue to investigate such opportunities in the future.

HISTORICAL AND CURRENT RELATIONS WITH SENIOR HOUSING PROPERTIES TRUST AND SUNRISE SENIOR LIVING, INC.

        We were formed in 2000 as a subsidiary of Senior Housing Properties Trust, or Senior Housing, a publicly tradedowned real estate investment trust, or REIT, with $1.2 billion of assets.REIT. We were created to operate nursing homes owned by Senior Housing which were repossessed from defaulting tenants. During 2000 and 2001, we closed certain unprofitable nursing homes and we stabilized operations at others. On December 31, 2001, Senior Housing distributed substantially all of our common shares to its shareholders in a spin-off transaction and we became a separate publicly traded company. We currently operate 87 senior living facilities, all of which we lease from Senior Housing. Marriott manages 31 of these facilities for us. We recently agreed to acquire five additional senior living communities for $45.5 million. We intend to use substantially all of the proceeds from this offering to partially fund this acquisition. The following chart summarizes our operations for 2001, on a pro forma basis as if we had conducted our current operations, and had completed our pending acquisition, as of the beginning of that year:

THE MARKET OPPORTUNITY

We believe significant opportunities exist for us to expand because of current conditions in the senior living industry, including:

A large number of senior living facilities are for sale.    As a result of excessive development of senior living facilities in the 1990s, many operators experienced lower than expected occupancy. Newly developed facilities attracted residents from established facilities. These factors resulted in increased financial pressure on operators who had incurred significant debts to finance their growth. Further, significant Medicare rate reductions forced many nursing homes into bankruptcy. These factors have caused many operators to offer facilities for sale or to seek to exit the industry.

The senior living business is improving.    New development of senior living facilities has been curtailed and many outdated facilities have closed. At the same time, the U.S. population continues to age. These factors have created increased occupancy at many existing senior living facilities. Labor is a major cost at senior living facilities and the current economic slow-down has lessened wage pressures. Also, nursing homes are adjusting their operations to new payment levels.

Many of our competitors are financially weak.    As a result of financial difficulties resulting from the factors described above, many of our competitors have recently been focused more upon reorganizing their debt than upon growth. Many senior living companies started in the 1990s have experienced failed business plans and have had difficulty attracting new capital. Some of our competitors cannot access growth capital because they are in or have recently emerged from bankruptcy and are now controlled by their former creditors.

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OUR GROWTH STRATEGY

Our growth strategy is to acquire facilities that provide high quality services to residents who pay with private resources. In January 2002, we leased 31 senior living communities from Senior Housing. Approximately 88% of the revenues from these communities is paid by residents from their private resources. At the five communities we have agreed to acquire, all of the revenues are paid by residents from private resources. Our nursing homes derive a majority of their revenue from Medicare and Medicaid. In the future we may decide to expand our nursing home operations; however, if we do so, we expect to price such acquisitions at levels which take account of the increased risks associated with Medicare and Medicaid revenues.

Our senior management team has significant experience in the senior living industry. Although we have substantial lease obligations, we currently have zero debt. We believe our relationship with our former parent company, Senior Housing, may provide us with capital to finance some acquisitions. We believe that this combination of our experienced management, our financial position and our relationship with Senior Housing will enable us to expand our operations and compete successfully in the senior living industry.

OUR HISTORY

We were formed in 2000 as a subsidiary of Senior Housing. In July 2000, Senior Housing repossessed senior living properties from former tenants and we began to operate those facilities. Between July 2000lease the nursing homes from Senior Housing which we formerly operated for it, and December 2001, we closed unprofitable facilities and stabilized operations of other facilities. At year end 2001, substantially all of our shares were distributed to Senior Housing shareholdersshareholders. Although we are now a separate public company, we maintain close relations with Senior Housing. Two of our directors are also trustees of Senior Housing. Senior Housing and we becamesometimes consider joint acquisition opportunities. Ninety-seven of the total 101 senior living communities which we currently operate are owned by, and leased from, Senior Housing, and Senior Housing has agreed to a separate company listed onsale and leaseback transaction which will provide the American Stock Exchange.majority of our funding for the LTA acquisition. We believe our close relationship with Senior Housing benefits us because it affords us an ability to consider larger investments than our independent resources might permit.

At the time of our spin-off we leased 56 senior living facilities which we formerly operated forspin off from Senior Housing, consisting of 54 nursing homes and two assistedwe agreed to lease 31 senior living communities with 5,2117,418 living units.units which Senior Housing had agreed to purchase. These communities were operated under long term contracts by a subsidiary of Marriott International, Inc., or Marriott. In 2003, Marriott sold its senior living subsidiary to a subsidiary of Sunrise Senior Living, Inc., or Sunrise. At about that time, Marriott and we had litigation concerning whether we could terminate Sunrise's management as a result of this sale, among other matters. This litigation was settled in early 2004, and Sunrise now operates these communities for our account. By mutual agreement of Sunrise and us, one of these communities was closed in May 2004. Our 2001 pro formaannualized revenues from these facilities are $227the remaining 30 Sunrise managed communities is approximately $300 million, and ourthese revenues, rent is $7 million annually.

In January 2002, we leased 31 up-market retirement communities with 7,487 living units, a majority of which are independent living apartments. Theseto Senior Housing and management fees to Sunrise related to these communities are managed by Marriott. Our pro forma 2001 revenues fromrecorded in our income statement. We continue to believe that the loss of the "Marriott" name was a serious loss for marketing these facilitiescommunities, but we are $277 million,working with Sunrise to maintain and our rent is $63 million annually plus a percentage of gross revenues which is escrowed as a capital expenditure reserve.

In January 2002, we agreed to acquire five senior living communities for $45.5 million. These five communities are located in five states and contain 704 living units, including 531 independent living apartments and 173 assisted living suites. These communities are 88% occupied and 100% of their revenues are paid from residents' private resources. We expect to finance this acquisition with the proceeds of this offering and our cash on hand. Before or after this acquisition is closed, we may enter a financing transaction for some or all ofimprove these properties. We expect this acquisition will be completed in April 2002, but there is no assurance that it will close. The closing of this acquisition is subject to completion of various state licensing matters and other customary closing conditions. This offering is not contingent upon our closing this acquisition.operations.

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The offering
THE OFFERING

The number of shares to be outstanding after the offering is based on 4,624,3338,538,634 shares outstanding on February 28, 2002.October 21, 2004. If the underwriters exercise their over-allotment option in full, we will issue an additional 450,000300,000 shares.

Unless otherwise stated, all information contained in this prospectus assumes no exercise of the over-allotment option we granted to the underwriters.

We are a Maryland corporation. Our principal place of business is 400 Centre Street, Newton, Massachusetts 02458, and our telephone number is (617) 796-8387.

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SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA

Summary historical and pro forma financial data

The following summary financial data has been derived from the financial statements included elsewhere in this prospectus, and shows, for the period or date presented, our summary historical and pro forma income statement and balance sheet data, giving effect to this offering and our pending acquisition of LTA, including the transactions which have occurredsale and transactions that we expectleaseback to occur as described in detail inSenior Housing of certain of the footnotes to our pro forma financial statements included elsewhere in this prospectus.acquired communities. As discussed under "Risk factors" and "Management's discussion and analysis of financial condition and results of operations", we are a relatively new company and our historical financial information is not necessarily reflective of our current operations. Accordingly, you should not place undue reliance on our historical financial information. In addition, pro forma financial information may not be reflective of what our financial results or financial position would have been had these transactionsthe LTA acquisition, including the sale leaseback with Senior Housing, been consummatedcompleted as of the dates indicated in our pro forma financial statements.

(1)

EBITDA consists ofWe consider earnings before interest, taxes, depreciation and amortization. We consideramortization, or EBITDA, to be an indicative measure of our operating performance. EBITDA is also useful in measuring our ability to service debt, fund capital expenditures and expand our business. Furthermore, we believe that EBITDA is a meaningful disclosure that will help shareholders and the investment community to understand better our financial performance, including comparing our performance to other companies. However, EBITDA as presented may not be comparable to amounts calculated by other companies. This information should not be considered as an alternative to net income, income from continuing operations, operating profit, cash flow from operations, or any other operating or liquidity performance measure prescribed by accounting principles generally accepted in the United States. Cash expenditures for various long term assets, interest expense and income taxes have been or will be incurred which are not reflected in EBITDA.EBITDA and have been and will be incurred.

4

Risk factors

Investing in shares of our common stock, or common shares, entails significant risk. The following is a description of the material risks which we can identify. There may be additional risks and uncertainties not presently known to us or that we currently deem immaterial that may also impair our business operations. You should carefully consider the risks and uncertainties described below and elsewhere in this prospectus before making an investment decision. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations. If any of the following risks or uncertainties actually occur, our business could be adversely affected. In this event, the trading price of our common shares could decline and you could lose part or all of your investment.

We have a short operating history.

We are a recently formed company, have a limited operating history, limited historical financial data, and we have operated as an independent public company only since December 31, 2001. Accordingly, we may be unable to execute our business plans effectively. Also, you should not place undue reliance on our historical financial information.

We cannot predict the trading market of our common shares.

Although a trading market exists for our common shares on the American Stock Exchange, our shares recently began trading. We are selling 3,000,000 common shares, assuming the underwriters do not exercise their over-allotment option, which equals 65% of our outstanding common shares before the offering. We can make no prediction as to the effect, if any, that market sales of our common shares or the availability of common shares for sale will have on liquidity, or your ability to readily buy or sell our common shares without adversely affecting the market price, or on the market prices prevailing from time to time. Sales of substantial amounts of our common shares in the public market, or the perception that such sales could occur, could adversely affect the liquidity of the market for our common shares and their price. The liquidity of the market and price of our common shares may be also adversely affected by changes in our financial performance or prospects, or in the prospects for companies in our industry generally.

Our operating margins are narrow and aA small percentage decline in our revenues or increase in our expenses can have a large negative percentage impact upon our profits.operating results.

Our pro forma operating        For the first six months of 2004, our revenues for 2001 are $507were $305 million and our pro forma loss before income taxes for 2001 is $55,000. Assuming the pending acquisition is completed, our pro forma operating revenues for 2001 are $521 million, and our pro forma income before income taxes is $4.5expenses were $303 million. A small percentage decline in our revenues or increase in our expenses might have a dramatic negative impact upon our income, may produce losses or may produce a need for additional capital which may not be available on acceptable terms or at all.income.

Our pending purchase of five senior living communities may not be completed.

We have agreed to purchase five senior living communities with 704 living units for $45.5 million. We intend to use the proceeds of this offering to partially fund this purchase. This purchase is subject to licensing and other customary conditions. Although we expect to complete this purchase during April 2002 it may not occur by then if at all. If this purchase does not occur, we intend to use the proceeds of this offering for our general business purposes including possibly other acquisitions which have not been identified. Any alternative use of the proceeds of this offering may be less profitable to us than the pending acquisition.

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Our growth strategy may not succeed.

Our business plan includes acquiring additional senior living facilities, some of which will be ownedcommunities and some of which will be leased. An acquisitioninstitutional pharmacies. This growth strategy involves risks. For example:

–>•

we may be unable to locate facilitiessenior living communities or pharmacies available for purchase at acceptable prices;



–>

we may be unable to obtain waivers of Senior Housing's rights of first refusal if the acquisition involves real estate;



–>•

we may be unable to access the capital to acquire or operate additional facilities because we have limited financeable assets, because our charter prohibits ownership of greater than 9.8% of our shares by any party or for other reasons;the expanded business;



–>•

acquired operations may bring with them contingent liabilities which mature;



•

to the extent we incur acquisition debt or leases, our operating leverage may increase; and



–>•

combining our present operations with newly acquired operations may be disruptive.disruptive of the operations or cost more than anticipated when acquisition prices are determined.

For these reasons and others, others:

•

our business plan to grow may not succeed, succeed;



•

the benefits which we hope to achieve by growing may not be achievedachieved; and



•

our existing operations couldmay suffer from a lack of management attention or financial resources if such attention and resources are devoted to a failed growth strategy.

Medicare or Medicaid rate reductions or a failureOur pending acquisition of those rates to match increasing costs could cause us to earn less or become unprofitable.LTA may not be completed and, if it is, we may not achieve anticipated benefits.

At some        Our pending purchase of our facilities, operating revenues are receivedLTA is subject to licensing, receiving third party consents and other conditions. Although we expect to complete this purchase before December 31, 2004, it may not occur by then or ever.

        The financial benefits we expect to realize from the Medicare and Medicaid programs. On a pro forma basis, giving effectLTA acquisition are largely dependent upon our ability to allincrease the occupancy of the transactions described inLTA communities and to realize cost savings by combining the notes toLTA operations with our pro forma financial statements, 40% of our total revenues in 2001, 41% if our pendingexisting operations. If the LTA acquisition does not close, was derived from these programs. Since 1998, a Medicare prospective payment system has generally lowered Medicare rates paid for services at facilities such as those thatoccur or if our management of the LTA communities does not increase revenues and lower historical costs, we operate. Many stateswill not realize the presently anticipated benefits and we may experience losses.

Our insurance costs have adopted formulasincreased and may continue to limit Medicaid rates. As a result, in some instances Medicare and Medicaid rates no longer cover costs incurred by operators, including us. Eleven of our nursing homes generated operating expenses in excess of operating revenues for 2001. These eleven facilities derived an average of 81% of their revenues from Medicare or Medicaid programs during 2001. At present there is an active debate within the federal government and within many state governments regarding whether current Medicare and Medicaid rates should remain at their current level. Medicare or Medicaid rate reductions or a failure of those rates to match our increasing costs could cause us to earn less or become unprofitable.

Nursing home and senior living operators like us are being subjected to increased litigation and insurance costs.increase.

There are various federal and state laws prohibiting fraud by healthcare providers, including criminal provisions that prohibit filing false claims for Medicare and Medicaid payments and laws that govern patient referrals. The state and federal governments seem to be devoting increasing resources to anti-fraud initiatives against healthcare providers.        In some states, advocacy groups have been created to monitor the quality of care at senior living facilities, and these groups have brought litigation against operators. Also, in several well publicized instances, private litigation by nursing home patients has succeededresidents of senior living communities for alleged abuses have resulted in winning very large damage awards for alleged abuses. The effectagainst other operating companies. Today, some

        Our charter places restrictions on the impactability of a default in other agreements.

We lease a substantialany person or group to acquire beneficial ownership of more than 9.8% (in number of facilities from Senior Housing under two leases. In addition to being cross-defaulted with one another, eventsshares or value, whichever is more restrictive) of default under eachany class of these leases include, among other things, our failure to pay obligations under agreements other thanequity shares. Additionally, the leases. In the future, if Senior Housing finances other facilities for us, we may agree to add facilities to existing leases or we may agree to further cross-default provisions. The existence of these cross-default provisions may create situations that we are unable to evaluate individually or that cause simultaneous defaults of several agreements, either of which could have a material impact upon our business.

Our existing contracts with Senior Housing and others may inhibit our ability to grow.

In connection with our recent spin-off from Senior Housing, we entered agreements which prohibit us from acquiring or financing real estate in competition with Senior Housing, HRPT Properties, Hospitality Properties or other real estate entities managed by Reit Management, unless those investment opportunities are first offered to Senior Housing, HRPT Properties, Hospitality Properties or those real estate entities. Although we have obtained the necessary waivers to allow us to complete the pending acquisition of the five communities described in this prospectus, these agreements may make it difficult, more expensive or impossible for us to acquire additional facilities in the future. In addition, certain provisionsterms of our leases with Senior Housing such as the provisions limitingand our ability to discontinue operations in any of the facilities or assign the leases, limitshared services agreement with RMR provide that our operating flexibility. Also, because of our various relationships withrights under these agreements may be cancelled by Senior Housing and Reit Management, competitorsRMR, respectively, upon the acquisition by any person or group of more than 9.8% of our voting stock, and upon other change in control events, as defined in those companiesdocuments. If the breach of these ownership limitations causes a lease default, shareholders causing the default may be unwilling to lease senior living facilitiesbecome liable to us or conduct business with us.to other shareholders for damages. Additionally, on March 10, 2004, we entered into a rights agreement whereby in the event a person or group of persons acquires or attempts to acquire 10% or more of our outstanding common shares, our shareholders, other than such person or group, will be entitled to purchase additional shares or other securities or property at a discount. These circumstances may prevent us from realizing some growth opportunities.

Senior Housing creditors may have the right to cancel our leases.

Our leases with Senior Housing are subordinated to mortgagesagreements and other indebtednessprovisions in our charter and bylaws may increase the difficulty of Senior Housing totaling $33.1 million at December 31, 2001,acquiring control of us by means of a tender offer, open market purchases, a proxy fight or otherwise, if the acquisition is not approved by our board of directors. Other provisions in our governing documents which may deter takeover proposals include the following:

•

staggered terms for members of our board of directors;



•

the power of our board of directors, without a shareholders' vote, to authorize and issue additional shares and classes of shares on terms that it determines;



•

a 75% shareholder vote and cause requirement for removal of directors; and



•

advance notice procedures with respect to nominations of directors and shareholder proposals.

        For all of these reasons, shareholders may be subordinatedunable to additional indebtedness that Senior Housing incurs. In the event Senior Housing defaults upon debtscause a change of control of us or to which our leases are subordinated, we may lose our rights to operate the leased properties.

Our management team has limited experience working together.

Our management team has been assembledrealize a change of control premium for less than two years. We do not have employment agreements with any of our executive officers. Two of our executive officers have other business interests which may prevent them from working full time on our business. All of our directors have other business interests which will prevent them from working full time on our business. These conditions may make it difficult for us to carry out our business plans.their common shares.

Our owned and leased properties are subject to real estate risks.

Our leases require that we pay for and indemnify Senior Housing from all liabilities associated with the ownership or operation of the facilities we lease from Senior Housing which arise prior to or

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during the terms of our leases. Also, we may own real estate in the future, including as a result of our pending acquisition. Accordingly, our business is subject to risks associated with real estate, including:

–>

costs associated with uninsured damages, including damages for which insurance may be unavailable or unavailable on commercially reasonable terms;

–>

costs and damages caused by eminent domain takings;

–>

costs that may be required for maintenance and repair; and

–>

the need to make expenditures due to changes in laws and other regulations, including the Americans with Disabilities Act.

Our business exposes us to environmental risks.

Under various laws in the United States, operators of real estate may be required to investigate and clean up hazardous substances present at their leased properties, including but not limited to medical waste, mishandled petroleum products and asbestos containing materials, and may be held liable for property damage or personal injuries that result from such contamination. These laws also expose us to the possibility that we become liable to reimburse the government for damages and costs it incurs in connection with the contamination. As the owner of real estate leased to us, Senior Housing may be also subject to similar liabilities, and we have agreed to indemnify Senior Housing from costs it incurs at our leased properties related to environmental hazards which arise prior to or during the terms of our leases. We can give you no assurance that environmental liabilities are not present in our operated facilities or that costs we incur to remediate contamination or the presence of asbestos will not have a material adverse effect on our business and financial condition.

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Forward-lookingWarning concerning forward looking statements

We have made statements that are not historical facts in this prospectus that constitute "forward-looking statements" as that term is defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements concern:        THIS PROSPECTUS CONTAINS FORWARD LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 AND FEDERAL SECURITIES LAWS. THESE STATEMENTS REFLECT OUR INTENT, BELIEF OR EXPECTATIONS, OR THE INTENT, BELIEF OR EXPECTATIONS OF OUR DIRECTORS AND OFFICERS, BUT THEY ARE NOT GUARANTEED TO OCCUR. FOR EXAMPLE:

–>•

our ability to successfully close the pending acquisition on negotiated terms or at all;OUR FUTURE INSURANCE COSTS AND INSURANCE RESERVE CALCULATIONS MAY BE GREATER THAN WE NOW ANTICIPATE;



–>•

our ability to manage effectively the 56 facilities we lease from Senior Housing and the communities we intend to acquire;WE MAY BE UNABLE TO CARRY OUT OUR BUSINESS PLAN TO EXPAND BECAUSE WE ARE UNABLE TO LOCATE EXPANSION OPPORTUNITIES AT PRICES WE ARE WILLING OR ABLE TO PAY;



–>•

Marriott's ability to manage effectively the 31 retirement communities we lease from Senior Housing;OUR RECEIVABLES RESERVES MAY BE INADEQUATE, ESPECIALLY THE RESERVES WHICH RELATE TO MEDICARE AND MEDICAID PAYMENTS BECAUSE SUCH PAYMENTS ARE SUBJECT TO GOVERNMENTAL AUDITS AND TO GOVERNMENT FISCAL POLICIES;



–>•

our ability to generate revenues in excess of our operating expenses and the sufficiency of these and other resources to provide capital for our growth or to pay our liabilities, including rent, as they come due;OUR PENDING ACQUISITION OF LTA MAY NOT BE CONCLUDED BECAUSE OF OUR FAILURE TO RECEIVE A THIRD PARTY CONSENT OR OTHERWISE;



–>•

our ability to close our pending $20 million line of credit;WE MAY BE UNABLE TO MAINTAIN OR IMPROVE OUR FUTURE OCCUPANCY RATES AND AS A RESULT OUR REVENUES MAY DECLINE;



–>•

our ability to access additional capital to fund our operations and growth;THE IMPROVING ECONOMY MAY RESULT IN WAGE PRESSURES WHICH INCREASE OUR FUTURE COSTS;



–>•

our ability to acquire and operate successfully additional senior living businesses; andFUTURE MEDICARE AND MEDICAID RATES MAY BE LOWER THAN WE NOW ANTICIPATE;



–>•

our ability to operate successfully as a separate public company.SUNRISE'S OPERATIONS OF THE COMMUNITIES WHICH IT MANAGES FOR US MAY RESULT IN LOSSES TO US; OR



•

WE MAY BECOME SUBJECT TO FINES OR REGULATORY SANCTIONS WHICH MATERIALLY ADVERSELY AFFECT OUR FINANCIAL CONDITION OR PERFORMANCE.

Also, whenever we use words such as "believe", "expect", "anticipate", "estimate" or similar expressions, we are making forward-looking statements. Forward-looking statements are not guaranteed to occur and involve risks and uncertainties. Our expected results may not be achieved, and actual results may differ materially from our expectations. This may be a result of various factors, including risks outlined under "Risk factors".        IN ANY SUCH EVENT, OUR FUTURE FINANCIAL PERFORMANCE MAY CAUSE THE IMPROVEMENTS IMPLIED BY OUR RECENT PERFORMANCE TO REVERSE AND WE MAY EXPERIENCE LOSSES. IF OUR FINANCIAL RESULTS DO NOT CONTINUE TO IMPROVE OUR STOCK PRICE LIKELY WILL DECLINE. AN INVESTMENT IN OUR SECURITIES INVOLVES A HIGH DEGREE OF RISK OF LOSS, AND INVESTORS SHOULD NOT PLACE UNDUE RELIANCE UPON FORWARD LOOKING STATEMENTS WHICH IMPLY OTHERWISE.

Investors should not rely upon forward-looking statements except as statements of our present intentions and of our present expectations which may or may not occur.

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Use of proceeds

The        Our net proceeds to us from this offering, assuming a public offering price of $8.29$7.10, the average of the high and low prices of our common shares on the American Stock Exchange on October 21, 2004, and after deduction of the underwriting discount and estimated offering expenses payable by us, are estimated to be $23.4$13.1 million ($26.915.2 million if the underwriters' over-allotment option is exercised in full). We intend to use these net proceeds to fund a portion of our pending acquisition of five communities for $45.5 million.general business purposes, including possible acquisitions which have not been identified. Until we complete our pending acquisition,utilize the net proceeds, we may deposit all or a portion of the net proceeds in interest bearing accounts or invest them in short term securities, including securities that may not be investment grade rated. In the event this acquisition is not completed we intend to use the net proceeds for general business purposes, including possibly other acquisitions which have not been identified.

Market price of common shares

Our common shares are traded on the American Stock Exchange under the symbol "FVE.""FVE". The following table presentssets forth for the periods indicated the high and low closing price for our common shares as reported onby the American Stock Exchange for each calendar quarter since they began to trade:Exchange:

On February 28, 2002 the last reported sale        The closing price of our common shares on the American Stock Exchange on October 21, 2004, was $8.29$7.13 per share.

        As of February 28, 2002,October 21, 2004, there were 3,890 shareholders of record of our common shares, and we estimate that as of such date there were approximately 5,000 shareholders of record60,500 beneficial owners of our common shares.

Dividend policy

We do not expect to pay dividends in the foreseeable future.

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Capitalization

The following table describes our capitalization, as of December 31, 2001,June 30, 2004, on a historical basis, and on a pro forma basis, after giving effect to our pending acquisition of LTA, including the transactions described insale and leaseback to Senior Housing of certain of the footnotes to our pro forma financial statements appearing elsewhere inacquired communities, and as adjusted for this prospectus:offering assuming a public offering price of $7.10 per share.

Dilution

The recent trading price of our common shares is less than their book value per share determined according to generally accepted accounting principles, or GAAP. Accordingly, assuming that you purchase our shares at the price set forth on the cover of this prospectus, you will not suffer dilution in book value. Book value per share at December 31, 2001,June 30, 2004, was $11.48;$7.72; as adjusted for this offering, assuming a public offering price of $8.29$7.10 per share, book value per share will be $9.53.$7.50.

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Selected financial data

The following table presents selected financial data which has been derived from our historical financial statements for the period from April 27, 2000 (the date we commenced operations) through December 31, 2001.2003 and for the six months ended June 30, 2003 and 2004. The following data should be read in conjunction with, and is qualified in its entirety by reference to, our consolidated financial statements and the notes thereto included elsewhere in this prospectus,prospectus. Prior to December 31, 2001, we were owned by Senior Housing and, "Management's discussion and analysis of financial condition and results of operations". Asas discussed under "Risk factors" and "Management's discussion and analysis of financial condition and results of operations", we are a relatively new company and our historical financial information before January 1, 2002 is not fully reflective of our current operations. Accordingly, you should not place undue reliance on our historical financial information.information before January 1, 2002.

The following table presents selected financial data of our two predecessorsfrom 1999 and has been2000 derived from historical financial statements of thoseour two predecessors, included elsewhere in this prospectus. The following data should be read in conjunction with the financial statements and notes thereto entitled Combined Financial Statements of Forty-Two Facilities acquired by Senior Housing Properties Trust from Integrated Health Services, Inc. and Combined Financial Statements of Certain Mariner Post-Acute Network, Facilities (OperatedInc., prior to their acquisition by Subsidiaries of Mariner Post-Acute Network) included elsewhere in this prospectus, and "Management's discussion and analysis of financial condition and results of operations—Historical results of operations—Mariner Predecessor" and "Historical results of operations—Integrated Predecessor". The following table presents the information from 1997 to 2000.Senior Housing.

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Management's discussion and analysis of financial condition and results of operations

You should read the following discussion in conjunction with our historical and pro forma financial statements and the financial statements of our predecessors and others included elsewhere in this prospectus.

OVERVIEW

We were incorporated in April 2000 as a Delaware corporation and reincorporated in Maryland in September 2001.        We were formed as a 100% owned subsidiary of Senior Housing. Effective July 1, 2000, we assumed the operations of healthcare facilitiescommunities from two bankrupt former tenants of Senior Housing. Pursuant to tax laws applicable to REITs, Senior Housing engaged FSQ, Inc., an independent operating company formed by our managing directors, to manage these communities. At the time we assumed operations of these facilities,communities, we had not received substantially all of the required licenses for these facilities.communities. As a result, for the period from July 1, 2000 through December 31, 2000, we accounted for the operations of these facilitiescommunities using the equity method of accounting and we only recorded the net income from these operations. Since that time,Thereafter, we have obtained all necessary licenses to operate these facilities,communities, and on January 1, 2001, we began to consolidate the results of operations of these facilities.communities. On December 31, 2001, Senior Housing distributed substantially all of our shares to its shareholders in a spin-offspin off transaction and we became an independenta separately traded public company. On January 2, 2002, in order to acquire the personnel, systems and assets necessary to operate these communities, we acquired FSQ, Inc. by merger.

Since we succeeded to substantially all of the business formerly conducted by subsidiaries or units of two former tenants of Senior Housing, these subsidiaries and units are considered to be our predecessors. We have included theSee "Selected financial statementsdata" for a discussion of these predecessors in this prospectus and discuss their resultsfinancial data of operations. Our predecessors' financial statements are entitled: Certain Mariner Post-Acute Network Facilities (referred to herein as Mariner Predecessor); and Forty-Two Facilities Acquired by Senior Housing Properties Trust from Integrated Health Services, Inc. (referred to herein as Integrated Predecessor).our predecessors.

Our revenues consist primarily of payments for services provided to residents at our facilities.communities. The payments are either paid formade by the residents, their families or insurers, referred to as private pay revenues, or by the Medicare and Medicaid programs. The substantial majority of our historical revenues have been paid by the Medicare and Medicaid programs. The substantial majority of the revenues associated with the 31 Marriott facilities are paid by the patients, or private pay. On a pro forma basis, after giving effect to the new lease which we entered for the 31 Marriott facilities in January 2002 and the pending acquisition of five facilities, forFor the year ended December 31, 2001,2003 and the six months ended June 30, 2004, private pay revenues would have represented 60%61% and 57% of our total revenues, or 59% if our pending acquisition does not close.respectively. Our expenses consist primarily of rent, wages and benefits of personnel, food, supplies, insurance and other patientresident care costs, as well as taxes, insurance and other property related costs.

We were a subsidiary of Senior Housing until December 31, 2001. The 2001 results presented in this prospectus are for a period during which we were a subsidiary of Senior Housing and they are not necessarily indicative of what our results would have been as a separate public company. Similarly these results are not indicative of future financial performance. Our future results of operations are expected to differ materially from the historical results presented in this prospectus. Material differences are expected because our future operations will include, among other factors, rent expense on leases to Senior Housing, general and administrative costs incurred by us as a separate company, revenues and expenses related to our lease entered in January 2002 for 31 retirement communities operated by Marriott and from the pending acquisition, if it closes.

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We accounted for our merger with FSQ as the termination of a management contract rather than as a business combination. As a result, at the closing of the merger, because the FSQ liabilities assumed plus the value of our common shares issued in connection with the FSQ acquisition exceeded the fair value of FSQ's assets acquired, we recognized an expense of $2.8 million. For this purpose, the fair value of our common shares was based on the average of the high and low price of our shares on the day of the merger, or $7.50 per share.

OUR HISTORICAL RESULTS OF OPERATIONS

As described above, we operated, until completion of the spin-off,spin off, we operated as a subsidiary of Senior Housing. Our past operations as Senior Housing's subsidiary prior to 2002 differ from our 2002, 2003 and current operations as an independent public company as follows:

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our historical operating business included certain facilities, assets and activities which we do not own or conduct and did not include such other factors discussed above; and

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the principal source of financing for these operating businesses was intercompany advances from Senior Housing, an entity with financial resources substantially in excess of ours.

We believe that because of these differences, the historical results of operations described below are not comparable to our current operations or our expected future operations.company. Specifically, in the historical periods discussed2000 and 2001, we operated only 56 propertiescommunities for Senior Housing, which owned the real estate as well as the operations. Effective December 31, 2001, we leasedbegan to lease these 56 facilitiescommunities (now 53 communities as we have closed and sold three communities) from Senior Housing which continued to own the real estate. OnIn January 11, 2002, we leased from Senior Housing an additional 31 communities (now 30 communities as we have closed one community) that are currently managed by Sunrise. Since Sunrise assumed this management from Marriott, the financial results of these communities have declined and this decline has had a material and adverse impact on our financial results. We are having discussions with Sunrise concerning possible improvements in the financial results of these operations. In April 2002, October 2002 and May 2003, we acquired and began to operate five, 15 and three, respectively, additional senior living communities. During 2002 and 2003, we disposed of six senior living communities. Our principal source of financing as a subsidiary of Senior Housing prior to 2002 was intercompany advances from Senior Housing, an entity with financial resources substantially in excess of ours. Because of these differences, we believe that our historical results of operations for periods prior to 2002 described below are not comparable to our operations since then or our expected future operations.

RESULTS OF OPERATIONS

Key Statistical Data (for the three and six months ended June 30, 2004 and 2003)

        The following tables present an overview of our portfolio for the three and six months ended June 30, 2004 and 2003:

        "Same Store" Communities (communities that we operated continuously since April 1, 2003 and January 1, 2003, respectively):

Three Months Ended June 30, 2004, Compared to Three Months Ended June 30, 2003

        Total revenues from residents for the three months ended June 30, 2004 were $150.5 million, an increase of 7% over revenues from residents of $140.5 million for the three months ended June 30, 2003. This increase is due primarily to higher per diem charges to residents and revenues from three additional communities that we began to operate on May 30, 2003. Revenues from residents at the communities that we have operated continuously since April 1, 2003, were $148.7 million and $140.1 million, for the three months ended June 30, 2004 and 2003, respectively, an increase of 6%. This increase is due primarily to higher per diem charges to residents. Approximately 43% and 42% of our revenues from residents in the three months ended June 30, 2004 and 2003, respectively, were received from Medicare and Medicaid. Revenues from our pharmacy, which was acquired in September 2003, were $2.9 million for the three months ended June 30, 2004.

        Interest and other income increased by $94,000 in the three months ended June 30, 2004 to $206,000, compared to $112,000 in the three months ended June 30, 2003, primarily due to interest

earned on mortgage notes receivable. The notes were received in the second half of 2003 as a result of asset sales.

        Expenses for the three months ended June 30, 2004 were $152.5 million, an increase of 7% over expenses of $142.0 million for the three months ended June 30, 2003. Our wages and benefits costs increased from $78.0 million to $79.9 million, or 2%, primarily due to wage increases as well as wages related to three communities we began to operate on May 30, 2003 and the pharmacy we acquired in September 2003. Other operating expenses, which include utilities, housekeeping, dietary, maintenance, insurance and community level administrative costs, increased from $35.5 million to $41.8 million, or 18%, primarily as a result of our operation of three additional properties on May 30, 2003 and our pharmacy acquisition in September 2003 as well as increased charges from third parties. Management fees related to the 30 communities managed for us by Sunrise for the three months ended June 30, 2004 and 2003, were $4.6 million and $4.2 million, respectively. The increase in fees at these 30 communities is the result of increased revenues at these communities. Rent expense to Senior Housing increased from $19.0 million to $20.5 million, or 8%, primarily due to the addition of three communities we began to lease anin May 2003, and additional 31 facilities from Senior Housing. Moreover, we now conduct our own affairs and incur costs as a separate public company some of which are more and some of which are less than the costs incurredrent for capital improvements that were funded by Senior Housing in 2003 and allocated2004. Community level operating expenses related to us in the historical periods.communities we operated throughout the three months ended June 30, 2004 and June 30, 2003 were $118.2 million and $113.2 million, respectively, an increase of 4%. This increase is primarily due to wage increases as well as increased charges from third parties.

Years ended December 31, 2001        Our general and 2000

We did not begin to operate the senior living facilities of our predecessors or generate revenue until July 1, 2000. Therefore, our resultsadministrative expenses for the yearthree months ended December 31, 2001, are not comparable to the year ended December 31, 2000.

Revenues for the year ended December 31, 2001,June 30, 2004 were $229.2 million. On a combined basis, the two predecessor entities had revenues$4.8 million, an increase of $220.719% over expenses of $4.0 million for the yearthree months ended December 31, 2000.June 30, 2003, primarily due to costs resulting from our increased operations and wage increases for our corporate personnel.

        Depreciation expense for the three months ended June 30, 2004 was $865,000, a decrease of 6% over depreciation expense of $920,000 for the three months ended June 30, 2003. This increase was due mainlychange is the net effect of decreases attributable to an increaseour sale of three communities in the average daily rate received during these periods.second half of 2003, offset by increases attributable to our purchase of furniture and fixtures related to the 30 communities that Sunrise manages.

Expenses        Loss from discontinued operations for the yearthree months ended December 31, 2001, were $228.8 million. OnJune 30, 2004 was $124,000, a combined basis,decrease of $526,000 over the predecessor entities had expensesloss for the three months ended June 30, 2003. This decrease is primarily the result of $253.4our ceasing operations at seven properties in the 2003 period compared with one property in the 2004 period.

        As a result of the factors described above, our net income for the three months ended June 30, 2004 was $943,000 compared to a loss of $2.1 million for the yearthree months ended December 31, 2000. The decrease is due primarily to rent and interest expenses which were included in the 2000 expenses of our predecessors but were zero in 2001 because, after Senior Housing's repossessions and foreclosures, rent and interest payments on the leases and mortgages ceased.

Period from April 27, 2000 (date operations commenced) through December 31, 2000

This period was our first period of operations and, therefore, there is no comparable period.

During 2000 we accounted for our investment in these operating businesses using the equity method of accounting. As a result, the reported revenues included our equity in earnings of these investees. Revenues for 2000 were $2.5 million and represent theJune 30, 2003. Our net amount of net patient revenues in excess of expenses of these operationsincome per share for the 2000 period. Net patientthree months ended June 30, 2004 was $0.11 compared to a loss per share of $0.25 for the three months ended June 30, 2003.

Six Months Ended June 30, 2004, Compared to Six Months Ended June 30, 2003

        Total revenues at the operating businessesfrom residents for the six months ended June 30, 2004 were $298.4 million, an increase of 6% over revenues from residents of $282.0 million for the six months ended June 30, 2003. This increase is due primarily to higher per diem charges to residents and our beginning operations at three additional communities on May 30, 2003. Revenues from residents at the communities that we have operated continuously since January 1, 2003 were $295.6 million and $281.7 million for the six months ended June 30, 2004 and June 30, 2003, respectively, an increase of 5%. This increase is due primarily to higher per diem charges to residents somewhat offset by a decrease in occupancy. Approximately 43% of our revenues from residents in the six months ended June 30, 2004 and 2003 were received from Medicare and Medicaid. Revenues from our pharmacy, which was acquired in September 2003, were $5.0 million for the six months ended June 30, 2004.

        Interest and other income increased by $1.5 million in the six months ended June 30, 2004 to $1.7 million compared to $228,000 in the six months ended June 30, 2003 due to our settlement of litigation with Marriott which commenced about the time Marriott agreed to sell its senior living management business to Sunrise. On January 7, 2004, we and Senior Housing settled then pending litigation with Marriott. Under the terms of the settlement, Marriott paid to us and Senior Housing $1.3 million each.

        Expenses for the six months ended June 30, 2004 were $303.0 million, an increase of 6% over expenses of $286.0 million for the six months ended June 30, 2003. Our wages and benefits costs increased from $154.3 million to $161.3 million, or 5%, primarily due to wage increases as well as wages related to three communities we began to operate on May 30, 2003 and the pharmacy we acquired in September 2003. Other operating expenses, which include utilities, housekeeping, dietary, maintenance, insurance and community level administrative costs, increased from $74.6 million to $79.9 million, or 7%, primarily as a result of increased charges from third parties, our operation of three additional properties on May 30, 2003 and our pharmacy acquisition in September 2003. Management fees related to the 30 communities managed for us by Sunrise for the six months ended June 30, 2004 and 2003, were $9.2 million and $8.5 million, respectively. The increase in fees at these 30 communities is the result of increased revenues at these communities. Rent expense to Senior Housing increased from $38.0 million to $40.6 million, or 7%, primarily due to the addition of three communities that we began to lease in May 2003, and additional rent for capital improvements that were funded by Senior Housing in 2003. Community level operating expenses related to the communities that we have operated throughout the six months ended June 30, 2004 and 2003 were $235.0 million and $228.6 million, respectively, an increase of 3%. This increase is primarily due to wage increases as well as increased charges from third parties.

        Our general and administrative expenses for the six months ended June 30, 2004 were $9.9 million, an increase of 16% over expenses for the six months ended June 30, 2003 of $8.5 million, primarily due to costs resulting from our increased operations.

        Depreciation expense for the six months ended June 30, 2004 was $1.8 million an increase of 6% over depreciation expense of $1.7 million for the six months ended June 30, 2003. This increase is primarily attributable to our purchase of furniture and fixtures related to the 30 communities which Sunrise manages offset by our sale of six communities in the second half of 2003.

        Loss from discontinued operations for the six months ended June 30, 2004 was $574,000, a decrease of $125,000 over the loss for the six months ended June 30, 2003. This decrease is primarily the result of our ceasing operations at seven properties in the 2003 period compared with one property in the 2004 period.

        As a result of the factors described above, our net income for the six months ended June 30, 2004 was $1.5 million compared to a loss of $4.5 million for the six months ended June 30, 2003. Our net income per share for the six months ended June 30, 2004 was $0.17 compared to a loss per share of $0.53 for the six months ended June 30, 2003.

Year Ended December 31, 2000,2003, Compared to Year Ended December 31, 2002

        The following tables present an overview of our portfolio for the years ended December 31, 2003 and 2002:

        "Same Store" Communities (communities that we operated continuously since January 1, 2002):

        Revenues from residents for 2003 were $114.5$576.0 million, an increase of 11% over revenues from residents of $519.1 million for 2002. This increase is attributable primarily to our beginning operations at 15 communities on October 26, 2002, and at three communities on May 30, 2003. Revenues from residents at the communities we operated throughout 2003 and 2002 were $236.7 million and $227.4 million, respectively, an increase of 4%. This increase is due primarily to higher per diem charges to residents and higher occupancy. About 39% of our revenues from residents in 2003 and 2002 were received from Medicare and Medicaid.

        Interest and other income decreased by $68,000 in 2003 to $229,000 compared to $297,000 in 2002 due to lower cash balances and lower interest rates in 2003 partially offset by interest earned on mortgage notes receivable.

        Expenses for 2003 were $583.8 million, an increase of 10% over expenses of $529.7 million for 2002. Our wages and benefits costs increased from $274.2 million to $315.6 million, or 15%, primarily due to expenses at the 18 communities we began to operate since October 2002 as well as increases in workers compensation and employee health insurance costs. Other operating expenses, which include utilities, housekeeping, dietary, maintenance, insurance and community level administrative costs, increased from $143.1 million to $151.0 million, or 6%, again primarily due to expenses at the 18 communities we began to operate since October 2002, as well as higher professional and general liability insurance costs. Management fees related to the 31 communities managed for us by Sunrise for 2003 and 2002, were $17.4 million and $16.6 million, respectively. This increase is primarily because these arrangements commenced on January 11, 2002, and, therefore, the 2003 period includes 11 more days than the 2002 period. Rent expense to Senior Housing increased from $75.2 million to $77.3 million, or 3%, primarily due to rents for communities we began to lease since October 2002, and

rent increases which accompanied Senior Housing's purchase of improvements at leased communities, partially offset by a lease modification entered into on October 1, 2002 which changed the ownership of certain reserve accounts for future capital expenditures at the communities managed by Sunrise. Community level operating expenses related to the communities we operated throughout 2003 and 2002, were $215.8 million and $210.6 million, respectively, an increase of 2%. This increase is primarily due to increases in employee health, workers compensation and professional and general liability insurance costs.

        Our general and administrative expenses for 2003 were $17.7 million, an increase of 15% over 2002 of $15.4 million, primarily due to costs resulting from our increased operations and to legal costs incurred in connection with our litigation with Marriott, which was settled in January 2004.

        Depreciation expense in 2003 was $3.6 million, an increase of 95% over depreciation expense of $1.8 million in 2002. The increase is attributable to our purchase of seven communities in the second half of 2002 as well as capitalized improvements to some of our communities which increased our depreciable assets.

        Loss from discontinued operations for 2003 was $372,000, a decrease of $2.5 million over the loss in 2002. This decrease is attributable to our dispositions of these operations as well as the recovery of some accounts receivable that were previously written off.

        As a result of the factors described above, our net loss for 2003 was $7.9 million, compared to a loss of $13.2 million in 2002. Our net loss per share in 2003 was $0.94 compared to a loss per share of $1.74 in 2002.

Year Ended December 31, 2002, Compared to Year Ended December 31, 2001

        The following tables present an overview of our portfolio for the periodyears ended December 31, 2002 and 2001:

        "Same Store" Communities (communities that we operated continuously since January 1, 2001):

        Revenues from residents for 2002 were $112.0 million.$519.1 million, an increase of 136% over revenues from residents of $219.7 million for 2001. This increase is attributable primarily to our lease of 31 communities on January 11, 2002, our acquisition of five communities on April 1, 2002, and the 15 communities we began to operate in October 2002. Revenues from residents at the communities we operated throughout 2002 and 2001 were $227.4 million and $219.7 million, respectively, an increase of 4%. This increase is due primarily to higher per diem charges to residents. About 39% of our revenues from residents in 2002 were received from Medicare and Medicaid, compared to 78% in 2001. This decrease is due largely to the 31 communities and other communities we leased or acquired during 2002, all of which are focused on services to residents who pay with private resources.

16        Interest income increased by $205,000 in 2002 from $297,000 compared to $92,000 in 2001 due to earnings on higher cash balances in the 2002 period.

        Expenses for 2002 were $529.6 million, an increase of 142% over expenses of $218.4 million for 2001. Our wages and benefits costs increased from $153.4 million to $274.2 million, or 78%, primarily due to expenses at the 51 communities we leased or acquired in 2002. Other operating expenses, which include utilities, housekeeping, dietary, maintenance, insurance and community level administrative costs, rose from $48.0 million to $143.1 million or 198%, again primarily due to expenses at the 51 communities we leased or acquired in 2002. During 2001, neither Marriott nor Sunrise managed any communities for us and we were a subsidiary of Senior Housing that did not lease any communities. As a result, we did not incur management fees or rent expense in 2001. Community level operating expenses related to the communities we operated throughout 2002 and 2001, were $210.6 million and $201.5 million, respectively, an increase of 5%. This increase is principally attributable to higher insurance premiums, an increase in reserves for the self funded portion of our insurance programs and higher wage and benefit costs, which were partially offset by a decrease in expenses from our reduced use of higher cost, third party staffing.

        Our general and administrative expenses for 2002 were $15.4 million, a decrease of 1% over 2001, primarily due to operational start up costs incurred during 2001 which we did not incur in 2002 and which were only partially offset by increased costs in 2002 associated with operating as a separate, publicly owned company and the legal and other costs incurred in connection with our litigation with Marriott.

        Depreciation expense in 2002 was $1.8 million, an increase of 38% over depreciation expense of $1.3 million in 2001. The increase is attributable to our purchase of 11 communities in 2002.

        Loss from discontinued operations for 2002 was $2.9 million, an increase of $2.0 million over the loss in 2001. This increase was the result of reserves recorded for Medicaid receivables due from the State of Connecticut related to community closure costs and an asset impairment charge related to a closed community.

        As a result of the factors described above, our net loss for 2002 was $13.2 million, compared to a profit of $527,000 in 2001. Our net loss per share in 2002 was $1.74. Assuming the shares outstanding as of December 31, 2001 were outstanding for all of 2001, our earnings per share would have been $0.12 for 2001.

LIQUIDITY AND CAPITAL RESOURCES

On        Our total current assets at June 30, 2004 were $68.4 million, compared to $59.7 million at December 31, 2003 and $48.3 million at December 31, 2002. At June 30, 2004 and December 31, 2003, we had cash and equivalents of $28.9 million and $21.2 million, respectively.

        Our total current liabilities were $51.1 million at June 30, 2004, compared to $58.1 million at December 31, 2003 and $34.4 million at December 31, 2002. The decrease from December 31, 2003 to June 30, 2004 was due primarily to our repayment of amounts outstanding under our revolving credit

facility and the payment of amounts due to Sunrise during the six months ended June 30, 2004. The increase from 2002 to 2003 was due to several factors. At December 31, 2003, we had $4.0 million outstanding under our revolving credit facility and there were no such outstanding amounts at December 31, 2002. In March 2004, we prepaid the amounts outstanding under our revolving credit facility. At December 31, 2003, we owed Senior Housing $6.6 million primarily related to our lease obligations. This amount was paid in January 2004. In addition, our accounts payable and accrued expenses and our accrued compensation and benefits increased primarily due to a historical basischange in the timing of certain current liabilities at the Sunrise managed communities as well as increases in our expenditures, including capital expenditures and forinsurance reserves. Finally, the increase in amounts due to Sunrise was primarily due to Sunrise's not transferring cash amounts due to them on a timely basis.

        As described in Note 1 to our audited financial statements, in 2003, information became available to us which resulted in $7.2 million of additional paid in capital. This amount was the result of our having received more working capital were provided by Senior Housing. We maintained no financing sources apart from Senior Housing.

Atassets and having assumed fewer liabilities than we had previously recorded at the time of our spin off from Senior Housing on December 31, 2001,Housing.

        Currently, we had cash of $24.9 million, operating accounts receivable of $36.4 million and accrued operating expenses and other liabilities totaling $17.8 million.

We lease all of our current facilities97 communities from Senior Housing.Housing under two leases. Our leases with Senior Housing require us to pay a total of $70$82.2 million of baseminimum rent annually. Percentage rent on our current leases does not begin until 2003 and 2004. We expect these increases to be modest relative to our overall liquidity. Payments required of us under our lease for 31 Marriott facilities also include a percentage of revenues for a capital expenditure reserve. If events of default under the leases occur, Senior Housing hasbegins in 2006. At October 21, we believe we are in compliance with the abilityterms of these leases.

        Our revenues from services to accelerateresidents at our rent payments. Our leases with Senior Housing are cross-defaulted with one another, and events of default include: our failure to pay rent when due; our default under any indebtedness which givescommunities is the holder the right to accelerate; our default under the Marriott management agreements; and our being declared ineligible to receive reimbursement under Medicare and Medicaid programs for any of the leased facilities.

On January 10, 2002, we accepted a non-binding letter of intent from a lender for a $20 million line of credit to be secured by our accounts receivable. This financing is subject to lender diligence, final documentation and other customary conditions. We expect this financing to close on or before March 31, 2002, but it may not close before that date or at all.

On January 23, 2002, we agreed to acquire five communities for $45.5 million. We expect to fund this acquisition with our cash, the proceeds of this offering and possibly also with proceeds of our proposed secured line of credit. We have also had preliminary discussions with Senior Housing concerning its providing interim or long term financing for this acquisition in the event that the funds available to us are not sufficient to close this acquisition; however, we have not reached any agreement with Senior Housing concerning such interim or long term financing.

Other than our leases with Senior Housing and our agreement to acquire five communities, we have no individually material contractual or commercial obligations or commitments.

Our primary source of cash to fund operating expenses, including rent, principal and routineinterest payments on our mortgage debt and capital expenditures, isexpenditures. At some of our communities, operating revenues for nursing home services are received from the residentMedicare and Medicaid programs. For the six months ended June 30, 2004, 43% of our total revenues were derived from these programs. In 2003, 39% of our total revenues were derived from these programs. Medicare and Medicaid revenues were earned primarily from the 51 nursing home communities we generate at our facilities. Changes in laws and regulations which impactlease from Senior Housing. Since 1998, a Medicare or Medicaidprospective payment system has generally lowered Medicare rates on whichpaid to senior living communities, including many of our properties rely for substantialthose that we operate. In October 2002, temporary increases in Medicare payment rates expired. In October 2003, Medicare rates increased by approximately 6%. Our Medicare revenues totaled $44.9 million during the first six months of 2004 and $86.1 million and $68.4 million during 2003 and 2002, respectively. Our Medicaid revenues totaled $73.9 million during the first six months of 2004 and $148.6 million and $142.6 million during 2003 and 2002, respectively. Some of the states in which we operate have not raised rates by amounts sufficient to offset increasing costs or are expected to reduce Medicaid funding. The magnitude of revenues, or changes in insurance costs caused by recent,the potential Medicaid rate reductions cannot currently be estimated, but it may be material litigation awards in some statesand may materially affect our future results of operations. Further Medicare and Medicaid rates declines may have a dramatic negative impact on our revenues and may produce greater losses.

        We expect recent increases in the costs of insurance, especially tort liability insurance, workers compensation and employee health insurance, which are affecting the senior living industry, will continue to have a material adverse impact upon our future results of operations. As discussed in Note 15 to our audited financial statements and note 7 to our unaudited financial statements, a failure by Integrated Health Services, Inc. or the United States Department of Health and Human Services to make payments that we believe are due to us would have a material adverse impact upon our future results. Also, we believe Marriott's sale of its senior living management business to Sunrise has had, and may continue to have, an adverse impact on our financial results and has increased, and may continued to increase, our working capital requirements.

        Also, prior to June 2004, pursuant to existing contract terms, a portion of our management fees payable to Sunrise were conditional, based on exceeding a threshold of net operating income that was not achieved and therefore was not being paid. As of July 2004, this portion of the management fee is no longer conditional and we will now be required to pay the full fee. We expect the annual amount of this additional management fee to be approximately $3.0 million per year. We expect improvements in our operations will offset this increased cost, but we can not be assured that our efforts in this regard will be successful.

        Our revolving credit facility limits our ability to incur debt as more fully described below in "Debt Instruments and Covenants". The terms of our leases with Senior Housing contain provisions whereby Senior Housing may cancel our rights under these agreements upon the acquisition by any person or group of more than 9.8% of our voting stock, and upon other change of control events. These leases also limit our ability to create, incur, assume or guarantee indebtedness.

        In August 2003, we sold a community in Seabury, Connecticut for $3.5 million, $3.15 million of which was in the form of a promissory note from the purchaser. This note is payable in monthly installments of $8,750 of principal, plus interest which accrues on the unpaid principal balance at a rate of 8% per year. This note matures on August 31, 2009, but we have the right to require prepayment as of August 31, 2008.

        In December 2003, we sold group homes in Maryland for $3.55 million, $3.11 million of which was in the form of a promissory note from the purchaser. This note is payable in monthly installments of $1,700 of principal, plus interest which accrues on the unpaid principal balance at a rate of 9%. This note matures November 30, 2018, but we have the right to require prepayment earlier by giving notice after November 30, 2009.

        During 2003, Senior Housing agreed to sell us two nursing homes in Michigan that we leased from Senior Housing. The purchase price is $10.5 million, the appraised value of the properties. On April 19, 2004, we purchased one of these properties from Senior Housing for $5.9 million. We financed this acquisition with proceeds we received from a new HUD insured mortgage and by using cash on hand. We expect the second purchase to occur in the fourth quarter of 2004 and we intend to finance the second sale with proceeds that we receive from a second HUD insured mortgage and with available cash. The remaining property is still leased from Senior Housing on a combined basis with 65 other properties. Under the terms of our lease with Senior Housing, upon completion of the sale, the annual rent payable under the combined lease is reduced by 10% of the sale prices we pay to Senior Housing.

        On August 9, 2004, we entered into an agreement to acquire an institutional pharmacy located in Nebraska that services 24 senior living communities with approximately 1,450 beds for approximately $3.0 million. This acquisition was completed on September 1, 2004.

        Despite the commitments, contingencies and limitations described above, we believe that a combination of our efforts to increase revenues and contain costs, our ability to borrow on our revolving credit facility, our ability to sell to Senior Housing certain capital improvements made to communities leased from Senior Housing and the possibility of sales or financings of our owned communities will be sufficient to allow us to meet our ongoing operating expenses, working capital needs, andoperating expenses, rent payments to Senior Housing, indebt service and capital expenditures for the short term, or next 12 months and long term, whether or not we arrangethe foreseeable future.

        As of June 30, 2004, our contractual obligations were as follows (dollars in thousands):

(1)

This amount represents amounts due under a HUD insured mortgage.

(2)

These amounts represent minimum lease payments due to Senior Housing under two leases through 2017 and 2020.

(3)

This amount represents our obligation to purchase a property from Senior Housing. This obligation is contingent upon our receiving HUD insured financing for a linesignificant part of this purchase price. See also "Business—Recent Developments" for a discussion of our agreement to acquire LTA which we entered into on September 23, 2004.

(4)

These amounts include liabilities for continuing care contracts which require residents to make advance payments; some of these contracts are refundable and carried as liabilities until they are paid and some contracts are not refundable and are carried as liabilities until they are recognized as revenues over the periods during which we expect to provide the service. These amounts also include insurance reserves related to workers compensation and professional liability insurance as well as deferred gains related to property sales.

Debt Instruments and Covenants

        In October 2002, we entered into a revolving credit securedfacility. The interest rate on borrowings on this facility is LIBOR plus a spread. The maximum amount available under this facility is $12.5 million, and is subject to limitations based upon qualifying collateral. The borrower under this facility is a subsidiary that we organized with the intention that it be "bankruptcy-remote". Certain of our other subsidiaries sell or contribute their accounts receivable to the borrower on a true sale basis and make certain representations and other undertakings in favor of the borrower in connection with each sale. The seller subsidiaries have granted security interests in their assets to secure their obligations to the borrower. We guarantee the seller subsidiaries obligations to the borrower subsidiary and have pledged the stock or membership interests in each of the seller subsidiaries to the borrower. The borrower has in turn collaterally assigned these undertakings, guarantees and collateral to the revolving credit facility lenders, and has granted a security interest in the purchased receivables and all of its other assets to secure its obligations under the facility. The facility is available for acquisitions, working capital and general business purposes. The facility contains covenants and events of default requiring the maintenance of collateral, minimum net worth and certain other financial ratios, and places limits on our ability to incur or assume debt or create liens with respect to certain of our properties, and other customary provisions. The accounts receivable collateralizing the facility totaled approximately $20.0 million, net of allowances of $1.5 million, as of September 30, 2004. In certain circumstances and subject to available collateral and lender approvals, the maximum amounts which we may draw under this credit agreement may be increased to $25.0 million. The termination date of the facility is October 24, 2005. As of June 30, 2004 and October 21, 2004, no amounts were outstanding under the

facility. At October 21, 2004 we believe we are in compliance with all applicable covenants under this revolving credit agreement and no amounts were outstanding under the facility.

        As described above, on April 19, 2004, we purchased a property from Senior Housing for $5.9 million. We financed this acquisition with $5.0 million in proceeds we received from a new HUD insured mortgage and by using cash on hand. The interest cost on this debt is 5.6% per year. Principal and interest is due monthly through April 2039. This mortgage contains standard HUD mortgage covenants. At October 21, 2004 we believe we are in compliance with all material covenants of this mortgage.

Related Party Transactions

        On December 31, 2001, Senior Housing distributed substantially all of its ownership of our receivables,shares to its shareholders. In order to effect this spin off and to govern relations after the spin off, we entered into agreements with Senior Housing, pursuant to which it was agreed, among other things, that:

•

so long as described above. Despite this belief,Senior Housing remains a REIT, we may not waive the share ownership restrictions in our operating cash flowcharter on the ability of any person or group to acquire more than 9.8% of any class of our equity shares without, among other requirements, the consent of Senior Housing and our determination that the exception to the ownership limitations would not cause a default under any of our leases;



•

so long as we are a tenant of Senior Housing, we will neither permit any person or group to acquire more than 9.8% of any class of our voting stock or permit the occurrence of other change in control events, as defined, nor will we take any action that, in the reasonable judgment of Senior Housing or HRPT Properties Trust (another REIT which owns shares of Senior Housing), or HRPT, might jeopardize the tax status of Senior Housing or HRPT as a percentageREIT;



•

Senior Housing has the option, upon the acquisition by a person or group of more than 9.8% of our revenues is small; a small percentage declinevoting stock and upon other change in revenue or increase incontrol events, as defined, to cancel all of our operating expenses could eliminate or reducerights under the leases we have with Senior Housing; and



•

so long as we maintain our operating cash flow. If our other resources, such as our cash on hand, or our pending $20 million line of credit, are not available or insufficient, the decline in operating cash flow may cause lease defaults or other material consequences.

Our shared services agreement with Reit Management allowsRMR or are a tenant under a lease with Senior Housing then we will not acquire or finance any real estate without first giving Senior Housing, HRPT, Hospitality Properties Trust, or HPT, or any other publicly owned REIT or other entity managed by RMR the opportunity to acquire or finance real estate investments of the type in which Senior Housing, HRPT, HPT or any other publicly owned REIT or other entity managed by RMR, respectively, invest.

        At the time of our spin off from Senior Housing, all of the persons serving as our directors were trustees of Senior Housing. Two of our current directors, Messrs. Martin and Portnoy, are current managing trustees of Senior Housing.

        As of October 21, 2004, we lease 97 senior living communities from Senior Housing for total annual minimum rent of $82.0 million. After giving effect to the LTA sale leaseback, we will lease 132 senior living communities for total minimum rent of $96.9 million.

        During 2003, we and Senior Housing were jointly involved in litigation with Marriott, the operator of the senior living communities which we leased from Senior Housing. We and Senior Housing equally shared the costs of this litigation. This litigation was settled in January 2004.

        Since we became a separate public company we have had and continue to have extensive business dealings with Senior Housing. Since January 1, 2002, we have entered or agreed to enter into several transactions with Senior Housing, including the following:

•

During 2002, we acquired seven senior living communities from a third party for $27 million. Prior to this acquisition Senior Housing waived its right to acquire these assets, subject to a continuing right to acquire or finance these assets in the event we determine to sell or finance them. To finance the cash portion of our purchase, we sold a senior living community to Senior Housing, which we purchased in April 2002, for $12.7 million, its approximate carrying value. Simultaneous with our acquisition, Senior Housing acquired eight other senior living communities from the same third party. We acquired operating assets and liabilities related to these eight communities. We began to lease these eight communities and the community we sold to Senior Housing for minimum annual rent of $6.3 million. The terms of this transaction with Senior Housing were negotiated on our behalf by our independent director who is not on the board of Senior Housing.



•

During 2002, we acquired FSQ, Inc., an entity owned by Messrs. Martin and Portnoy, in a merger transaction that was entered into as part of our spin off from Senior Housing. We acquired all of the stock of FSQ, Inc. and Messrs. Martin and Portnoy each received 125,000 of our common shares. The board of trustees of Senior Housing received an opinion from an internationally recognized investment banking firm, to the effect that the merger was fair, from a financial point of view, to us. The terms of this merger were approved by Senior Housing's trustees other than Messrs. Martin and Portnoy.



•

During 2003, pursuant to the terms of our leases with Senior Housing, Senior Housing purchased $11.4 million of improvements to its properties leased by us, and the annual rent payable to defer paymentsSenior Housing was increased by 10% of the amounts invested, or $1.1 million.



•

In May 2003, Senior Housing purchased from an unrelated third party three assisted living properties with 143 living units located in Virginia for $6.5 million. In September 2003, we sold Senior Housing one independent living property with 164 units in California for $12.3 million, its appraised value. These four properties were added to Reit Managementan existing lease with Senior Housing for nine other independent and assisted living properties. The minimum rent for the properties included in this lease was increased by $1.9 million per year. All other terms of the lease remained unchanged.



•

In July 2003, we agreed to buy two nursing homes in Michigan that we leased from Senior Housing. The purchase price is $10.5 million, the appraised value of the properties. One of these purchases for $5.9 million closed on April 19, 2004 and we expect the second sale to close in the fourth of quarter 2004, which is contingent on our obtaining HUD insured financing for the property. The remaining property is still leased from Senior Housing on a combined basis with other nursing home properties. Under the terms of our lease with Senior Housing, upon completion of the sale, the annual rent payable under the combined lease is reduced by 10% of the net proceeds that Senior Housing received from the sale.



•

On March 1, 2004, Senior Housing purchased from us one independent and assisted living community with 229 units located in Maryland. The purchase price was $24.1 million, the appraised value of the property. Simultaneous with this purchase, our existing leases with Senior Housing were modified as follows:



•

the lease for 53 nursing homes and the lease for 13 independent and assisted living communities were combined into one lease and the property acquired on March 1, 2004 was added to this combined lease;

•

the combined lease maturity date was changed to December 31, 2020 from December 31, 2018 and 2019 for the separate leases;



•

our minimum rent for the combined lease of 53 nursing homes and 14 independent living communities was increased by $2.4 million per year;



•

for all of our leases with Senior Housing, the amount of additional rent to be paid to Senior Housing was changed to 4% of the increase in revenues at the leased properties beginning in 2006. Prior to the lease combination, the percentage and the beginning time period for the nursing home lease and the independent and assisted living community lease was 3% and 2004 and 4% and 2005, respectively; and



•

all other lease terms remain substantially unchanged.



•

On September 23, 2004, we entered into a letter agreement with Senior Housing whereby Senior Housing agreed to loan us between $115 million and $117 million at the closing of our pending LTA acquisition. Such loan would be for up to 30 days and bear interest at a rate of 8% per annum. We expect to repay such loan, if incurred, with the proceeds we receive from a $165 million sale leaseback with Senior Housing for 35 of the 47 communities we acquire in the LTA acquisition.



•

In 2003, Senior Housing evicted a nursing home tenant that had defaulted on its obligations to Senior Housing. Until May 2004, we managed this nursing home for Senior Housing's account. Effective on May 1, 2004, we agreed with Senior Housing to add this nursing home to a multi-property lease from Senior Housing and to increase the annual rent by $180,000. All other lease terms remained unchanged.



•

One of the properties we lease from Senior Housing was subject to a ground lease with an unaffiliated third party. We are responsible for paying the ground rent of $307,000 per year. On June 3, 2004, Senior Housing exercised an option to purchase this land for $3,600,000 and acquired the landlord's rights and obligations under the ground lease. We now pay the ground rent to Senior Housing.



•

During 2004, pursuant to the terms of our leases with Senior Housing, we sold to Senior Housing $4.3 million of improvements we had made to its properties, and our annual rent payable to Senior Housing was increased by 10% of Senior Housing's purchase price amounts invested, or $432,000.

        We obtained a workers compensation insurance policy for the year beginning June 15, 2003, from a third-party insurer. This third-party insurer ceded a portion of the premiums we paid to a Bermuda based company, Affiliates Insurers, Limited, or Affiliates, which was owned by RMR. Affiliates was organized by RMR to assist us in creating a partial self insurance program on an expedited basis. On December 8, 2003, we acquired Affiliates from RMR for an amount equal to RMR's cost of organizing and capitalizing that company, approximately $1.3 million.

        Our Chief Executive Officer and Chief Financial Officer are also officers and employees of RMR. These officers devote a substantial majority of their business time to our affairs and the remainder to RMR's business which is separate from our business. We believe the compensation we pay to these officers reasonably reflects their division of business time; however, periodically, these individuals may divide their business time differently than they do currently and their compensation from us may become disproportionate to this division.

        RMR provides investment, management and administrative services to us under a shared services agreement. RMR is compensated at an annual rate equal to 0.6% of our total revenues. Aggregate fees earned by RMR for services during 2002 and 2003 and in 2004 through September 30, were $2.9 million, $3.4 million and $2.7 million, respectively. The fact that RMR has responsibilities to other

entities, including our landlord, Senior Housing, could create conflicts; and in the event of such conflicts between Senior Housing and us, the shared services agreement if necessaryallows RMR to act on behalf of Senior Housing rather than on our behalf. RMR is owned by Messrs. Martin and Portnoy who are our managing directors. Messrs. Martin and Portnoy each have material interests in the transactions between us and RMR described above. All transactions between us and RMR are approved by our independent directors. Our independent directors have approved the renewal of the shared services agreement for its current term which will end December 31, 2004.

        Messrs. Martin and Portnoy own the building in which our headquarters is located. Our lease for space was originally executed by FSQ, Inc. This lease expires in 2011. We paid rent under this lease during 2002 and 2003 and for the nine month period ending September 30, 2004 of $539,000, $569,000 and $423,000 respectively.

        Until March 31, 1997, Mr. Portnoy was a partner of Sullivan & Worcester LLP, our counsel and counsel to Senior Housing, RMR and affiliates of each of the foregoing, and he received payments from that firm during 2002, 2003 and 2004 in respect of his retirement.

Critical Accounting Policies

        Our critical accounting policies concern revenue recognition, our assessment of the net realizable value of our accounts receivable, the realizable value of long term assets, accounting for long term care contracts, accounting for business combinations and our assessment of reserves related to our self insurance programs.

        Our revenue recognition policies involve judgments about Medicare and Medicaid rate calculation. These judgments are based principally upon our experience with these programs and our knowledge and familiarity with the current rules and regulations of these programs. We recognize revenues when services are provided and these amounts are reported at their estimated net realizable amounts. Some Medicare and Medicaid revenues are subject to audit and retroactive adjustment.

        Our policies for valuing accounts receivable involve significant judgments based upon our experience, including consideration of the age of the receivable, the terms of the agreements with our residents or their third party payors, the residents or payors stated intent to pay, the residents or payors financial capacity and other factors which may include litigation or appeal proceedings.

        We monitor our long-term assets to determine whether any impairment of these assets may have occurred. If the facts and circumstances indicate that an impairment may have occurred, we evaluate the asset's carrying value to determine whether an impairment charge is appropriate. This process includes a review of historical and projected future financial results realized or to be realized from the affected asset, market conditions affecting the sale of similar assets and the like. This process requires that estimates be made and errors in our judgments or estimates could have a material effect on our financial statements.

        At certain of our communities, we offer long-term care contracts under which residents pay a one time amount in exchange for reduced charges during their stay. The one time amount may be refundable or non-refundable, or partially refundable and partially non-refundable. We record such amounts as a long term obligation and amortize the non-refundable portion of such amounts into revenue over our estimate of the periods during which future services will be provided. We base these estimates on our experience and actuarial information.

        Since we became a separate public company on December 31, 2001 through October 21, 2004, we have acquired or leased a total of 54 communities. We accounted for each of these transactions as a purchase business combination in accordance with Statement of Financial Accounting Standards No. 141. Purchase accounting requires that we make rent paymentscertain judgments and estimates based on our experience, including determining the fair value and useful lives of assets acquired and the fair value of liabilities assumed. Some of our judgments and estimates are also based upon published industry statistics.

        Our critical accounting policies for determining reserves for the self funded parts of our insurance programs involve significant judgments based upon our experience, including projected settlements for pending claims, known incidents which we expect may result in claims, estimates of incurred but not yet reported claims and incidents, our claims experience, estimated litigation costs and other factors. We also periodically receive and rely upon recommendations from professional consultants in establishing these reserves.

        In the future we may need to revise the judgments, estimates and assessments we use to formulate our critical accounting policies to incorporate information which is not now known. We cannot predict the effect changes to these premises underlying our critical accounting policies may have on our future results of operations, although such changes could be material and adverse.

Inflation and Deflation

        Inflation in the past several years in the U.S. has been modest. Future inflation might have both positive or negative impacts on our business. Rising price levels may allow us to increase occupancy charges to residents, but may also cause our operating costs to increase. Also our ability to increase rates paid by Medicare and Medicaid will be limited despite inflation.

        Deflation would likely have a negative impact upon us. A large component of our expenses consist of minimum rental obligations to Senior Housing. OnAccordingly we believe that a pro forma basis, assuming completion ofgeneral decline in price levels which could cause our January 2002 lease for 31 Marriott facilities andcharges to residents to decline would likely not be fully offset by a decline in our pending acquisition, payments to Reit Management for shared services would have totaled $3.1 million during the year ended December 31, 2001.expenses.

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SEASONALITYSeasonality

Our business is subject to modest effects of seasonality. During the fourth calendar fourth quarter holiday periods, nursing home and assistedresidents of senior living residentscommunities are sometimes discharged to join family celebrations and admission decisions for new residents are often deferred. The first quarter of each calendar year usually coincides with increased illness among nursing home and assisted livingour communities' residents whichthat can result in increased costs or discharges to hospitals. As a result of these factors, nursing home and assisted livingour operations sometimes produce greater earnings in the second and third quarters of a calendar year and lesser earnings in the first and fourth quarters. We do not believe that this seasonality will cause fluctuations in our revenues or operating cash flow to such an extent that we will have difficulty paying our expenses, including rent, which do not fluctuate seasonally.

INFLATION AND DEFLATIONQuantitative and Qualitative Disclosures About Market Risk

Inflation in the past several years in the United States has been modest. Future inflation might have both positive or negative impacts on our business. Rising price levels may allow us        We are exposed to increase occupancy charges to residents, but may also cause our operating costs, including our percentage rent, to increase.

Deflation would likely have a negative impact upon us. A large component of our expenses consist of minimum rental obligations to Senior Housing. Accordingly we believe that a general decline in price levels which could cause our charges to residents to decline would likely not be fully offset by a decline in our expenses.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We have no obligations for funded debt and as such are not directly affected by changes in market interest rates. However, as discussed above, we expect to enter a $20 million revolving credit facility secured by our accounts receivable. We expect that this loan facility will require interest on drawn amounts at floating rates based upon a spread above LIBOR. Accordingly, whenever borrowing are outstanding under such a credit facility we may be exposed torisks associated with market changes in interest rates, especiallyrates. We manage our exposure to this market risk through our monitoring of available financing alternatives. Other than as described below we do not now anticipate any significant changes in our exposure to fluctuations in interest rates or in how we manage this risk in the future. However, our exposure to fluctuations in interest rates may increase in the future if we incur debt to fund acquisitions or otherwise. As of October 21, 2004, we have no commercial paper, derivatives, swaps, hedges, joint ventures or partnerships.

        Changes in market interest rates also affect the fair value of our debt obligations; increases in market interest rates decrease the fair value of our fixed rate debt, while decreases in market interest rates increase the fair value of our fixed rate debt. For example, based upon discounted cash flow analysis, if prevailing interest rates were to decline by 10% and other credit market considerations remained unchanged, the market value of our $5.0 million mortgage debt outstanding on June 30, 2004, would increase by approximately $353,000; and, similarly, if prevailing interest rates were to increase by 10%, the market value of this $5.0 million mortgage debt would decline by approximately $313,000.

        Our revolving credit facility bears interest at floating rates and matures in October 2005. As of September 30, 2004, we had zero outstanding under this revolving credit facility. We borrow in U.S. dollars and borrowings under our revolving credit facility are subject to interest at LIBOR plus a spread. Accordingly, we are vulnerable to changes in U.S. dollar based short term LIBOR rates.rates, specifically LIBOR. A change in interest rates would not affect the value of any outstanding floating rate debt but would affect our operating results. For example, if the fullmaximum amount of a $20our credit facility of $12.5 million line of credit were drawn and interest rates roseincrease or decrease by 1% per annum, our interest expense would increase or decrease by $200,000$125,000 per year, or $0.04$0.02 per share.

We may fromshare, respectively. If interest rates were to change gradually over time, to time consider our exposure to interest rate risks if we have or expect to have material amounts of floating rate obligations. As a result of these considerations we may decide to purchase interest rate caps or other hedging instruments.

CRITICAL ACCOUNTING POLICIES

Our most critical accounting policies regard revenue recognition and our assessment of the net realizable value of our accounts receivable. These policies involve significant judgments based upon our experience, including judgments about changes in payment methodology, contract modifications and economic conditions that may affect the collectibility of our accounts receivable. In the future we may need to revise our assessment to incorporate information which is not yet known and such revisions could increase or decrease our net revenues or cause us to adjust the net carrying value of our accounts receivable.

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HISTORICAL RESULTS OF OPERATIONS—MARINER PREDECESSOR

The Mariner Predecessor conducted operations of 17 facilities leased from Senior Housing. The operations of the Mariner Predecessor during the period prior to its acquisition by Senior Housing differ from our operations as follows:

–>

The business of the Mariner Predecessor was conducted by its then parent, Mariner Post-Acute Network, an entity with a capital structure, corporate overhead costs, and operating systems substantially different than ours.

–>

During the period of Mariner's operation of this business, significant write offs of goodwill and other long lived assets of the Mariner Predecessor occurred and Mariner filed for bankruptcy.

We believe that because of these differences, the historical results of operations described below are not comparable to our operations. Specifically, the historical operations described below include: revenues and operating expenses for only 17 facilities, one of which has since been closed, while currently we generate revenues and incur operating expenses at present at 87 facilities; revenues prior to 1999 which were based in part upon Medicare rates established prior to the completion of the phase-in of the new Medicare prospective payment system; depreciation expenses which relate to real estate and amortization expenses which relate to goodwill, while we do not have substantial depreciable assets; expenses related to allocation of corporate overhead by the parent of these operations, while we incur different corporate expenses; rent expense under a lease which has been cancelled; charges for impairments of long lived assets of substantial amounts, while we do not have substantial long lived assets and have not incurred similar changes; and interest expense incurred on debt, while we have no debt as of the date of this prospectus.

Years ended December 31, 2000 and 1999—Mariner Predecessor

Revenues for the year ended December 31, 2000, were $85.3 million. These revenues represent a decrease of $1.6 million from the revenues in the 1999 period. This decrease is attributable primarily to a slight decrease in occupancy at the facilities in operation during both periods and to the closing of one facility.

Expenses for the year ended December 31, 2000, were $92.6 million, a decrease of $1.6 million over the 1999 period, excluding non-recurring or unusual charges and write offs incurred in 1999. This decrease is attributable primarily to decreases in general and administrative costs and provision for bad debts and rent, offset by an increase in salary, wages and benefits.

Net loss for the year ended December 31, 2000, was $7.4 million, a decrease in loss of $36.4 million over the 1999 period. This decrease in loss is principally attributable to the impact of unusual charges related to the impairment of long lived assets in 1999.would be spread over time.

HISTORICAL RESULTS OF OPERATIONS—INTEGRATED PREDECESSOR

The Integrated Predecessor conducted operations of 42 facilities leased from or mortgaged to Senior Housing. The operations of the Integrated Predecessor during the period prior to its acquisition by Senior Housing differ from our operations as follows:

–>

The business of the Integrated Predecessor was conducted by its then parent, Integrated Health Services, Inc., an entity with a capital structure, corporate overhead costs, and operating systems substantially different than ours.

19

–>

During the period of Integrated Health Services' operation of this business, significant write offs of goodwill and other long lived assets of the Integrated Predecessor occurred and Integrated Health Services filed for bankruptcy.

We believe that because of these differences, the historical results of operations described below are not comparable to our operations. Specifically, the historical operations described below include: revenues and operating expenses for only 42 facilities, one of which has since been closed, while we currently generate revenues and incur operating expenses at 87 facilities; revenues prior to 1999 which were based in part upon Medicare rates established prior to the completion of the phase in of the new Medicare prospective payment system; depreciation expenses which relate to real estate and amortization expenses which relate to intangible assets, while we do not have substantial depreciable assets; expenses related to corporate overhead and management fees charged by the parent of the Integrated Predecessor, while we incur different corporate expenses; rent expense under a lease which has been cancelled; charges for impairments of long lived assets of substantial amounts, while we do not have substantial long lived assets and have not incurred similar charges; and interest expense incurred on debt, while we have no debt as of the date of this prospectus.

Years ended December 31, 2000 and 1999—Integrated Predecessor

Revenues for the year ended December 31, 2000, were $135.4 million. These revenues represent an increase of $5.0 million over the revenues in the 1999 period. This increase resulted primarily from an increase in Medicaid rates and an increase in occupancy at the Integrated Predecessor facilities.

Expenses for the year ended December 31, 2000, excluding non-recurring or unusual charges and write offs of $16.7 million as discussed in the next paragraph, were $144.0 million, a decrease of $2.1 million from the 1999 period. This decrease is attributable primarily to a decrease in rent, depreciation and amortization at the Integrated Predecessor facilities offset by increased operating expenses.

During the 2000 period, the Integrated Predecessor incurred unusual charges related to a loss on settlement of lease and mortgage obligations of $16.7 million. These charges were a result of the bankruptcy settlement between Integrated and Senior Housing and represent the carrying value of the tangible and intangible assets of the facilities conveyed to Senior Housing, less the debts due Senior Housing which were not paid. During the 1999 period, the Integrated Predecessor incurred write-offs and unusual charges related to a loss on impairment of long lived assets of $120.0 million.

Net loss for the year ended December 31, 2000, was $25.3 million, a decrease of $101.7 million from the net loss of $126.9 million in 1999. This decrease in loss is attributable to the decreases in rent, depreciation and amortization and the impact of unusual charges discussed above.

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Business

GENERAL

We are in the business of operatingoperate senior living facilities,communities, including independent living and congregate care communities, assisted living facilitiescommunities and nursing homes. WeAs of October 21, 2004, we operated 101 communities containing 13,967 living units, including 49 primarily independent and assisted living communities containing 9,120 units and 52 nursing homes containing 4,847 units. Of our 49 primarily independent and assisted living communities, we lease and operate 56 senior living facilities. We lease 3146 communities that Marriott manages. Combined, these 87 facilities, which we leasecontaining 8,727 units from Senior Housing, our former parent, including 30 communities which are directly operated for our account by Sunrise, and own and operate three communities containing 393 units. All but one of our nursing homes are leased from Senior Housing. Our 101 communities include 4,0604,960 independent living apartments, 1,7662,324 assisted living suites, 294283 special care beds and 6,578 nursing beds; 59% of their revenues in 2001 was paid from residents' private resources and 41% was paid by Medicare and Medicaid.

We have recently agreed to purchase five senior living communities which we will own and operate. In combination with our existing facilities, these 92 facilities include 4,591 independent living apartments, 1,939 assisted living suites, 294 special care beds and 6,5786,400 nursing beds. Sixty percent of our pro forma revenues from these 92 facilities in 2001 was paid from residents' private resources and 40% was paid by Medicare and Medicaid:

FIVE STAR UNITS AFTER COMPLETION OF PENDING ACQUISITION		FIVE STAR REVENUES AFTER COMPLETION OF PENDING ACQUISITION

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OUR BUSINESS AND GROWTH STRATEGY

Our growth strategy is to acquire facilities that provide high quality services to residents who pay with private resources. In January 2002, we leased 31 senior living communities from Senior Housing. Approximately 88% of the revenues from these communities is paid by residents from their private resources. At the five communities we have agreed to acquire, all of the revenuesprincipal executive offices are paid by residents from private resources. Our nursing homes derive a majority of their revenue from Medicare and Medicaid. In the future we may decide to expand our nursing home operations; however, if we do so, we expect to price such acquisitionslocated at levels which take account of the increased risks associated with Medicare and Medicaid revenues.

Our senior management team has significant experience in the senior living industry. Although we have substantial lease obligations, we currently have zero debt. We believe our relationship with our former parent company, Senior Housing, may provide us with capital to finance some acquisitions. We believe that this combination of our experienced management, our financial position400 Centre Street, Newton, Massachusetts 02458, and our relationship with Senior Housing will enable us to expand our operations and compete successfully in the senior living industry.telephone number is (617) 796-8387.

OUR HISTORY

In July 2000, Senior Housing repossessed or acquired senior living facilities from two former tenants.        We were created by Senior Housing in April 2000 as a 100% subsidiary to conduct the businesses of operating these facilities. Under the amended Internal Revenue Code,operate nursing homes repossessed or IRC,acquired from two former Senior Housing was required to engage an independent operating company to manage the healthcare businesses which we owned. Messrs. Portnoy and Martin formed FSQ, Inc. to manage these facilities. During the past year, we believe the combined operations at these 56 facilities have stabilized and improved.

In August 2001, Senior Housing agreed to acquire 31 Marriott senior living facilities. The operations at these 31 communities are managed by Marriott under long term management contracts. The operating income generated by these facilities is not REIT qualified income under applicable IRC rules. To complete this acquisition and remain a REIT, Senior Housing was required to identify a taxable entity to lease these facilities.

tenants. We were reincorporated in Maryland on September 17, 2001. On December 31, 2001, Senior Housing distributed substantially all of our outstanding shares to its shareholders and we became a separate publicly owned company listed on the American Stock Exchange. Pursuant to the transaction agreement governing this spin-off:spin off:

–>•

Senior Housing capitalized us with approximately $50 million of equity, consisting of cash and working capital, primarily operating receivables, net of operating payables;



–>•

we agreed to lease 31 primarily independent and assisted living communities operated by Marriott upon their acquisition by Senior Housing which occurred in 2002, as described below;



•

we leased 56 facilities53 nursing homes and two independent and assisted living communities from Senior Housing;



–>•

we assumed one lease from the town of Campbell, Nebraska; and



•

we agreed to merge withacquire FSQ, Inc., the former operating company of the healthcare business we owned in order to acquire the personnel, systems and assets necessary to operate these 56 facilities; and

for our business.

–>

        During 2002, we agreed to leasecommenced operations at 51 senior living communities, including the 31 communities then operated by Marriott and currently operated by Sunrise, and 20 additional communities. Also during 2002, we ceased operations at two communities, one of which was previously leased from Senior Housing when they wereand one of which was previously leased from the town of Campbell, Nebraska.

        During 2003, we commenced operations at three senior living communities, which we lease from Senior Housing. Also during 2003, we ceased operations at seven communities, one of which was previously leased from Senior Housing. During 2003, we also acquired by Senior Housing.

Effective January 2, 2002,an institutional pharmacy located in Wisconsin, we completed our merger with FSQ, Inc. As consideration for this merger Messrs. Portnoy and Martin each received 125,000acquired a company insuring some of our common shares.risks, and we established certain self-insurance programs.

RECENT DEVELOPMENTS

On January 10, 2002,September 23, 2004, we entered into an agreement to acquire LTA for approximately $208 million. LTA is a non-binding letterprivately owned company that owns and operates independent and assisted living communities in the southeastern United States. Pursuant to the agreement, we expect to acquire 47

senior living communities with 2,636 independent and assisted living units which are located in the following seven states:

        The majority of intentthese communities were built by LTA between 1997 and 2002, and the average age of all 47 communities is approximately five years. As of June 30, 2004, these 47 communities were 85% occupied, and 100% of the revenues at these communities were paid by residents from their private resources.

        To finance this acquisition, we intend to enter into a $165 million sale leaseback transaction with Senior Housing for a new, three year, $20 million credit line which35 of the 47 communities that will be securedacquired from LTA. We intend to continue to operate those 35 communities and to retain ownership of the remaining 12 communities. We expect to fund the balance of the purchase price with cash on hand, and primarily by assuming HUD insured long term mortgage debt and a lease for four communities from Health Care Property Investors, Inc.

        In addition to the 47 communities currently operated by LTA for its own account, LTA also manages 12 assisted living communities on behalf of third party owners. These 12 communities have 957 living units and are located in Florida (5 communities with 515 units), Georgia (5 communities with 334 units), Virginia (1 community with 56 units) and North Carolina (1 community with 52 units). We do not now know whether we will continue to manage these communities on a long-term basis.

        Our business plan for the LTA communities is to increase revenues by increasing occupancy at the communities. We also expect to realize cost savings by combining the LTA operations with our accounts receivable. Althoughexisting operations. Of course, we can provide no assurances that the closingexpected financial benefits from the LTA acquisition will be achieved.

        Completion of this transactionour acquisition of LTA is subject to various conditions customary contingencies,in transactions of this type, including licensing and receiving third party consents. Subject to satisfaction of these conditions, we expect itthis closing to occur on or before March 31, 2002.during the fourth quarter of 2004, but there is no assurance that it will close.

        On September 1, 2004, we acquired an institutional pharmacy business located in Lincoln, Nebraska for approximately $3 million.

22OUR GROWTH STRATEGY

On January 11, 2002, Senior Housing completed its acquisition        We believe that the aging of the 31 MarriottU.S. population will increase demand for existing independent living properties, assisted living communities and nursing homes. Our principal growth strategy is to profit from this demand by operating such properties that provide high quality services to residents who pay with private resources. Since we leasedbecame a separate public company through October 21, 2004, we added 49 primarily independent and assisted living communities to our business which generate 88% of their revenue from residents' private resources, rather than from Medicare or Medicaid.

        Starting in the mid 1990s, a large number of independent and assisted living communities were developed with financing from private equity and real estate opportunity funds. We believe that many of these facilities from Senior Housing.

On January 23,communities are now at or approaching stabilized operations and many of these financial investors are now anxious to sell. For example, in 2002 we acquired 15 independent and assisted living communities which were assembled and developed by Constellation Health Services, Inc., a division of Constellation Energy Group, Inc. f/k/a Baltimore Gas and Electric Company. The controlling shareholder of LTA, which we have agreed to acquire, fiveis a private equity fund that was created by an investment bank. We expect to continue to pursue similar acquisitions for the next several years.

        We also intend to expand our institutional pharmacy business. We acquired our first pharmacy in Waukesha, Wisconsin in 2003. As described in "Recent Developments", during 2004, we acquired a second pharmacy located in Lincoln, Nebraska. Whenever we buy an institutional pharmacy business we seek to grow its business by providing services at our senior living communities for $45.5 million. The closing of this acquisition is subjectwithin the same service area. We are currently interested to completion of various state licensing matters andacquire pharmacies in other customary closing conditions, and althoughareas where we expect it to be completed during April 2002, weown senior living communities. We can giveprovide no assurances that itwe will close. We intendbe able to usecontinue these pharmacy expansion activities, but we believe we will do so.

        Our nursing homes derive a majority of their revenues from Medicare and Medicaid. In the proceedsfuture we may decide to expand our nursing home operations; however, if we do so, we expect to value such acquisitions at levels which take account of the risks we believe to be associated with Medicare and Medicaid revenues, particularly the risks that governmental fiscal policies may result in reduced Medicare and Medicaid rates or that such rates will not increase to match increasing costs of operations.

        In addition, from time to time, we consider acquisition opportunities in service industries other than senior care, but we have no such considerations underway at this offering to partially fund this acquisition.time.

TYPES OF FACILITIESCOMMUNITIES

Our present business plan contemplates the ownership, leasing and management of senior apartments, independent living apartments assisted living facilities,or congregate care communities, assisted living communities, specialty care suites and nursing homes. Some facilitiescommunities combine more than one type of service in a single building or campus.

Senior apartmentsIndependent Living Apartments or Congregate Care Communities

Senior apartments are marketed to residents who are generally capable of caring for themselves. Residence is usually restricted on the basis of age. Purpose built facilities may have special function rooms, concierge services, high levels of security and assistance call systems for emergency use. Tenants at these facilities who need healthcare or assistance with the activities of daily living are expected to contract independently for these services with home healthcare companies.

Independent living apartments

Independent living apartments,properties, or congregate care communities, as they are sometimes called, also provide high levels of privacy to residents and require residents to be capable of relatively high degrees of independence. Unlike a senior apartment facility, anAn independent living apartment usually bundles several services as part of a regular monthly charge—forcharge. For example, one or two meals per day in a central dining room, weekly maid service andor a social director.director may be included in the base charge. Additional services are generally available from staff employees on a fee-for-servicefee for service basis. In some congregate care communities,independent living properties, separate parts of the facilitycommunity are dedicated to assisted living or nursing services. At September 30, 2004, our business included 4,960 independent living apartments in 38 communities.

Assisted living facilitiesLiving Communities

Assisted living facilitiescommunities are typically comprised of one bedroom suitesunits which include private bathrooms and efficiency kitchens. Services bundled within one charge usually include three meals per day in a central dining room, daily housekeeping, laundry, medical reminders and 24 hour availability of assistance with the activities of daily living such as dressing and bathing. Professional nursing and healthcare services are usually available at the facilitycommunity on call or at regularly scheduled times. At September 30, 2004, our business included 2,324 assisted living suites in 41 communities.

Specialty Care Suites

        Specialty care suites offer specialized programs for patients suffering from specific illnesses, usually Alzheimer's disease. At September 30, 2004, our business included 283 specialty care suites in 9 communities.

Nursing homesHomes

Nursing homes generally provide extensive nursing and healthcare services similar to those available in hospitals, without the high costs associated with operating theaters, emergency rooms or intensive care units. A typical purpose built nursing home includes mostly two-bed unitstwo bedrooms with a separate bathroom in each unitroom and shared dining and bathing facilities. Some private rooms are often available for those residents who can afford to pay higher rates or for patientsresidents whose medical conditions require segregation. Nursing homes are generally staffed by licensed nursing professionals 24 hours per day.

During the past few years, At September 30, 2004, our business included 6,400 nursing home operatorsbeds in 75 communities.

OPERATING STRUCTURE AND CORPORATE STAFFING

        We have facedsix regional offices, which are located in Maryland, Georgia, California, Wisconsin and two significant business challenges. First, the rapid expansionin Nebraska. Each regional office is responsible for up to 15 communities. Each region is headed by a regional director of the assisted living industry which startedoperations with extensive experience in the early 1990s has attractedsenior living industry. Each regional office is typically supported by a numberclinical or wellness director, a rehabilitation services director, a regional accounts manager, a human resources specialist and a sales and marketing specialist. Regional staff are responsible for all our community operations within the region, including:

•

resident services;



•

marketing and sales;



•

hiring of residents away from nursing homes. This was especially significant becauseall community personnel;



•

compliance with applicable legal and regulatory requirements; and



•

supporting our development and acquisition plans within their region.

        Our home office staff performs the residents who chose assisted living facilities often previously had been following tasks:

•

general oversight of our regional staff and pharmacy operations;



•

the most profitable residents in the

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nursing homes. These residents required a lesser amountestablishment of carecompany wide policies and were ableprocedures relating to pay higher private rates rather than government rates.

The second major challenge arose as a result of resident care;



•

human resources policies and procedures;



•

information technology;



•

Medicare and Medicaid cost containment laws, particularly 1997 federal legislation that requiredbilling;



•

licensing and certification maintenance;



•

legal services;



•

central purchasing;



•

budgeting and supervision of maintenance and capital expenditures;



•

implementation of our growth strategy; and



•

accounting and finance functions, including operations budgeting, accounts receivable and collections, accounts payable, payroll, general finance and accounting, and tax planning and compliance.

INDEPENDENT AND ASSISTED LIVING COMMUNITY STAFFING

        Each of the Medicare programindependent and assisted living communities we operate for our own account has an executive director responsible for the day to implementday operations of the community, including quality of care, resident services, sales and marketing, financial performance and staff supervision. The executive director is supported by department heads, who oversee the care and service of the residents, a prospective payment programwellness director, who is responsible for various subacutecoordinating the services necessary to meet the health care needs of our residents and a marketing director, who is responsible for selling our services. Other key positions include the dining services coordinator, the activities coordinator and the property maintenance coordinator.

NURSING HOME STAFFING

        Each of our nursing homes is managed by a state licensed administrator who is supported by other professional personnel, including a director of nursing, an activities director, a marketing director, a social services director, a business office manager, and physical, occupational and speech therapists. Our directors of nursing are state licensed nurses who supervise our registered nurses, licensed practical nurses and nursing assistants. Staff size and composition vary depending on the size and occupancy of each nursing home and on the type of care provided inby the nursing homes. Implementationhome. Our nursing homes also contract with physicians who provide certain additional medical services.

PHARMACY OPERATIONS AND STAFFING

        Our pharmacy operations provide goods and services to operators and residents of this Medicare prospective payment program began on July 1, 1998. Priorsenior living communities; we do not sell to the prospective payment program, Medicare generally paid nursing home operators based upon audited costspublic generally. At our pharmacy we have an executive director who is a state licensed pharmacist, who manages the pharmacy and supervises billing. The executive director is responsible for services provided. The new prospective payment system sets Medicare rates based upon government estimated costs of treating specified medical conditions. Although it is possible that a nursing home may increase its profit if it is ablethe day to provide services at below average costs, we believe that the effectday operations of the Medicare prospective payment system has beenbusiness including sales and will be to reducemarketing, financial performance, monitoring state regulated codes regarding the profitabilitydispensing of Medicare services in nursing homes. This belief is based upon our observationcontrolled substances and staff supervision. Other pharmacy personnel, include licensed dispensing pharmacists, a director of the impact of similar Medicare changes that were implemented for hospitals during the 1980spharmacy consultation, medical records director, nurse consultant, pharmacy technicians and the large number of bankruptcies which have occurred in the nursing home industry since the implementation of the Medicare prospective payment system began.billing personnel.

OUR SENIOR LIVING FACILITIESCOMMUNITIES

Assuming we close        At October 21, 2004, our pending acquisition of five communities, we will lease or operate 92business included 101 senior living facilities: five facilitiescommunities which we expect to ownmay be categorized into three groups as follows:

COMMUNITIES OWNED AND OPERATED BY FIVE STAR

        As of October 21, our business included four owned communities containing 393 independent and operate directly; 56 facilities included in one lease which we operate directly; and 31 communities included in a second lease which are managed by Marriott:

(1)

In addition to the $63 million of rent, we are required to pay a percentage of our gross revenue as an escrowed reserve for recurring capital expenditures. In 2001 this pro forma amount was $7.3 million.

(2)

For the twelve months ended November 30, 2001.

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PENDING ACQUISITION

In January 2002, we agreed to purchase five senior living communities. Our acquisition of these five communities is subject to completion of various state licensing matters and other customary closing conditions. At this time we expect to own and operate these communities directly. In the future we may decide to finance these properties with Senior Housing or another third party. These five communities contain 704assisted living units and are149 nursing beds located in fivefour states. The following table provides additional information about these five communities and their current operations: